1200 THIRD AVENUE, SUITE 1620
SAN DIEW, CALIFORNIA 92101-4178
TELEPHONE: (619) 236-6220
9 MAY 2005
EXHIBITNO.
Minutes of the Council of the City of San Diego
for the Regular Meeting of Tuesday, March 8,2005
Page 13
ITEM-S404: Audit Committee of the City of San Diego
(Citywide)
TODAY'S ACTIONS ARE:
Adopt the following resolutions:
Subitem-A: (R-2005-933) ADOPTED AS RESOLUTION R-300203
In order for the City to achieve the full benefit of the work of Kroll Associates,
Inc. under an agreement with the City dated February 10,2005, the City Council
affirms to the City's outside Auditor, KPMG, and all interested parties that, for
the purposes described in such agreement, Mr. Lynn Turner, Mr. Troy Dahlberg,
and Mr. Arthur Levitt are serving as the Audit Committee of the City as
contemplated by the Sarbanes-Oxley Act of 2002 (Pub. L. 107-204, 116
Stat. 745).
Subitem-B: (R-2005-933)
ADOPTED AND INCORPORATED IN RESOLUTION
R-300203 (SUBITEM-A)
In order for the City to expedite the work of the Audit Committee and facilitate
the release of the audit letter by the City's independent auditor as well as to
demonstrate the continued cooperation by the City of San Diego with the inquiries
of the U.S. Securities and Exchange Commission and the U.S. Attorney for the
Southern District of California, the City Council approves of the execution of a
letter of cooperation.
FILE LOCATION:
Subitems A & B: MEET
COUNCIL ACTION:
(Time duration: 10:38 a.m. - 11:30 a.m.)
MOTION BY PETERS TO ADOPT THE RESOLUTION TO CREATE THE AUDIT
COMMITTEE, AND AS PART OF THAT ACTION TO AGREE TO THE
EXECUTION OF THE LETTER OF COOPERATION. Second by Madaffer.
Vote taken to appoint the Audit Committee: Passed by the following vote: Peters-yea,
Zucchet-yea, Atkins-yea, Young-not present, Maienschein-yea, Frye-yea, Madaffer-yea,
Inzunza-yea, Mayor Murphy-yea.
Minutes of the Council of the City of San Diego
for the Regular Meeting of Tuesday, March 8,2005
Page 14
Vote taken to sign the Letter of Cooperation proposed by Mr. Turner: Passed by the
following vote: Peters-yea, Zucchet-yea, Atkins-yea, Young-not present, Maienscheinyea, Frye-nay, Madaffer-yea, Inzunza-yea, Mayor Murphy-yea.
NON-DOCKET ITEMS:
None.
ADJOURNMENT:
The meeting was adjourned by Mayor Murphy at 7: 13 p.m.
FILE LOCATION:
MINUTES
COUNCIL ACTION:
(Time duration: 7: 13 p.m.)
FROM :
FFlX
May. 08 2005 E36:52RM
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is an ,&OH .to rupd~aym on tl3e stztus d khc. h d ? t C e a m t s
im;tigd'L.im; Ck~.&-t with o m etll@g&n&t letter, the A u ~ t ~ ~ha&r hr.l$:
: ~ ~ e
~P&*
the f~l3m1ng:
ktciewIK3 t I t ~
reports and &kd. gxhibik prepared by V:i~,on'& :E&k,
City Atkmq;.artd Lnre Forward.
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Add&o&;
we h w e reqtteuted dmumcnti~nsupparting bkd CfLy
& ~ ~ w Ycolwems
' ' B . and iiwcfi~ipp
6411, including 4 of the pmsedme~5and
me&od~lagkz applied anrl dl dw~~ments
id&t~fied. We bdim it &
h n p ~ h ~ ~ iraised
; ~ ~ by
cs
the Crty Attorney be thmighly irtw.tsdigat&.
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FROM :
May. 07 2B05 04 :18PM P2
NO. :
aob4P5''on
g* d&m~hangpin th+:Cit~~
~&,t,io&p. The AurNt C m h c d 8se dxe w a k
&
&fu&ng d ~ m e ! m
qnd evf~lt~r~r
rnre&.tO the
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engapment
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Co~mxtittgeRpn detmrninad ta r c t h their.own independent legal ~ ~ 2 I
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shata
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by
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YOI puWe$c~~nprii.~t~.
We are 'kdwi&:an
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rtPBgal pp$&m.
$.iadsctq batt iim it*. Jiinited b: h$&,+igatimgEatnin ae@ a& as vwkg
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by .rhgindepdcnr audito~'~
and required by generally accq&d .&ucB$t~g
-&&&&,. md S E E R S wwrtilm et pivIkgo. We aEWEh fn~,
yarrt .iy&~mion
a
cupy of ilrr .@~:tkg e ~ ~ l i nhow
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M q n d e r r t Inwiestiptiom
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&nd&?&d. Also {ci-hed B pih11ct;l by the A m r i m .h,Utub af ~mEfi&'hrbk
:ay
FFlX NO.
FROM :
:
May. 07 2805 04: 34PM
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hare. d i ~ c u ~ mqncsfions
d
rcganding the length d time wc&w ta
id^^
m p & @.owjnue!j@h. We have bccn clear rrmt t:bincepttori af o;ux.~~t&t.f&m
Xn. .&$? m a k g &at wo wad fall rooperatim from ,dlPmkia4;' invdlved Ih '&f to
mrrtpiw fiiu ?nlu.&tig-~~tion.
This d l dsct rtqufw i'ull ct~rnp1i''nce and . p w d r n ~ h
dpmna'srqu~sted
by my law dfurmmt w y .
mq?m&d
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a:&f$
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& h a @ Co&im
hai g[lss~$y
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my ~ p p
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q.md hhmgcr and.mmbms ~f tbe LSamd h t 2 E h e . : c r b i h h
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& &yt!~w.ti~n
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E ~ i tL h e arrmkpanyi.ng Em-<mn.
&@&&#Irqpmk cbmUg*
r d d to PB " % ' khs'
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t,e&
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d 'mimre84iRation. . M ahoard requiz& & i t
W&E
jn~e.paw
+ytdu&$ :intlds inskee dze City. all dty e m p h j a and .&fit&&ahJ
m f k fw-perat+! i m provide
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complete mc& .m a.11..inhwma~o.w.as
w da
;.
di:-&lv
r d t e a q iswes'tkxit axe i&ati?fic!al cl-g
thr inv-,
Ta
sie&Fkte t r l a ~ ~ ~ cnf
t i aU
& matcrjafs rcqumtcd by. the %.
&ehs. ~ d .d
aot oocvrred in a timely ~ c ! T Syma
.
.clmetl:~er~ag
'haw nnt
gbe&
been pm&grd. gime oithc pmH-erns with d&arnent pmduaionfisp havehmthe
F+$UR
wrn hiWRy S& ~ p bu
, t.c;&hrly .a& iR d i~ ma.geer .
mu# &
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p ~ a ~ ~ . ~ ~ y i ~ d d
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h.m'lfib: 'impmaavc!a e . q I c t c and thurmgh ~ ~ & plan
i m.be.&~~Iap.u,i
mcj
.hmp..Wd.,bm'in*mtigption. and a ~ ~ ~ ~ e n c t a t wjll
i c t niili$iclodc
s
addna4.w the
: w w p ness51y to remediate iwus %at havet Qr mty E1;6i.&, Until,.&*.
&g
ane w u ? & it is diir~tl~t
.if M I impnluible. to -d
~ k c nttt.
ix
.. m
. #..igat$m
wXU 'kromphd,
,.
H~wever,we belkve.thatB the e&e& of k b u a d
a-iak
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FRX NO. :
FROM :
,
rn
May. 07 2005 04:19PM
ail .imuL.!& it ig. b~p.c~rtal"A
and ~ w t a i d yw gc4 .that
. m & a i 5 m .w:Ube mdedbefatc the end of the.calm& ,year.
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FROM :
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FOX NO.
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May. 07 2005 08:EllAM
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haY&of S!gnI3iego
city Council of $an p i d g ~ .
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.Sari Diega, CA 92101
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. & s r m g bf the smpt a d teims ofthe kgaiement of ~ r o i ' . .
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.bi the '9'rnDiego City C o m i l C'ths.~oun$"). It is uhdc~stsodthdt . . *,.
dhOUgh, a&b h g h i d by the Cbm~i].,
w e !xiU p d ~ r m
OWS@CX?S with complete . . .
blfd, the City, 'of S.d bkgb: CYbe fity'3, t&
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indtpendeiOe fio& .
City'$agen~i@
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d&iaaents,
ihiolved
. th.is . . . . . .
partj! .hl
. ~ s D c ~ ~-h
' )City's
, elected-. officias .*OX- &'o&~x
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& City of San ~ i e g o~al30migmads s v~1mkq
d i s ~ l o n n. ~
,wing +ith h e four NatiOnallyRgcognked Municipal Securiges ~nformatio~~~e~ositO~es
r&&d
by &e S-tiei
Exchange Cojunisshn (SBC); Thit fist'provided .a
d ~ s ~oftho
t ~
&d:ed
O ~ =rued kt'uaridliabilitr ,vfthe Sand Mega City ~ r n ~ i o ~. c s ?
~ ~ ksystem
. .tagether
~ t 4th + j e c t i o ~ anticipating ths .gii,wth 'inthe liabigty=an
:cs&&te
& w e d Kabi1w for Pqrt ietirexrht health c e baikfiis konferrf:d cai th=
. citfs retirkd WOI:&E~S.
WED, as idescription i f the atchaniicdby w w the City funded
the system. ThL.saona desc?ibd tluipesbus.arors d i s ~ o ~ a ki$dths footnotes of the
.. fI
c,i~',audited. &&
i c i d - .statements...... subseqdentlYi.rathi ag@1'es .have
domgr&d &e i+hg
of t h o i t y ' s debt-andh ~ e s t i g i t i have
o ~ bem odinrhmcad
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ideIc&a.fii city h! &&d K P M io
~ pe&mii ai in'dep&&nt audit if its ib03 .
mual. fbxicial' &itementi. - We also understand Vinson & E W (V&E). issled an .
' invcstiga;tive xport d a M September 16,- ,2404 entitled . "The City of S m ' Diego, .
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FRX NO. :
FROM : '
May. 07 2005 08:05RM
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Calif0mia3j.~rndoikrdof ~bli~atiofi
-'to ~ u n hthe ' San Diego City Binp1o)eesy
Rekement Sysand Related Disc~asure- pmctices ' 1996-2004. VV~&
RkCo~4'mded
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~ ~ andb changed
c djb t+
~ Municipal
~ ~ ~6de.''' . Subsequent td tha issWce of ibis .
.
requesh$.additional compefenl evidential maker it
rtipOh
ye m & m d that
*L
in 3aqcbrdAw with applioable accountbg; auditing ..
. . . deems necessary t o
5
that frnther i$ekigatiori .be,weinto ceffai? .%a&,. .
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, :. d d ~mfe~sinnal'st:ahdardsds~d
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alsq &d&&d' V&E hasbeen engaged to perfpm this 'additional work It is o&, . . .
:, mrrL&ding
W M G h& re.q&sted the r e d d of the V&E invcstigatiohs,'.iswdl as' ths
,
results ~f :o&s0ing investigby the City ~ttomey,bs received, revitwed aad
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evatuated'by an iiildep&dent
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third
. party,
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he City h i &4ucitd thar KIOU (1)ricteive, raviiw
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ev&vaie ~IEfindings of the
idvestigatiocms bi v&E ind &the City Attorney, The..Cityh& also nque%ed Kroll ptovidc,
- coMting &-ce
in ksessing 'intend &ntral d=fi~isnciesaffectting mattefs di&xised'
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. the. investigation reports.
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of
ingngdmmt:A~;illbe in two h e $ .
.first
d the engrigizmA.
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will be for KrdU tb sesvk as' m:hdipcnd.entTnvest;gatdr for rnaees relatktg to {l) tbe . . .
. . &&d
miliity of.the SDCE& 9nd (2) emrs'discavmed.irt,thsfoothotes of-the kity's. .
. au&ed -ua;t . .finm~id
statehents. we
. . exp&
. . tbm pbrise ittbeJjrojeot will includei - . .
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with KPMG to. mierstand heir con~erii~
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s&sfa&ry work p~bg& .&at .will'assh fikn ki. ob$&hbig the necebsary. ..
-. ehdencc bnd docmen&n. .. ?q&ed.
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by applicable 'accounting,
'auditin&
and . .. .
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s v ndcvduite
i n v tiit reparts ii invtGigatiins of ttis mattkr*we
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' .-e5].Qy undagtand will be ismed by V&E and thbb~ity'~ttomey..
We
gderstand
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'that.the Com~ilwilJ d.i+ct V.dtB 'ahd Me CitS;.Attomey to prctvid~us scc;ss to -. . . .
. . . . whats~er.~omati6n
they have related to their &v?stigatiow. . This :shall indude .
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. ., . . (a) readin' and ,reviewing these reports,. (b) reoo&eading chwges' in scope of
. . tip: wbrk perf~&ed thai'.will m e t a e ' need3 d KPMG and where' i e ( l e e m a ' . .
i n
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e s s w(c) pcrf~&g d d i t i o d p r o ~ e d ~ e s ' wconsidsr
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nccessarjr to reach,: .:
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- ,' . conclusion$ or obtaiti ividexitial mattor tbat is required by KPMG; Xn doing kioi.: . .
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4; will reqiire &condition@ i ~ c s tos all bformatiibn gathered; by the per son&.
and dbcum~ntsof thb City, $?CERS,.V&E, the City Attorney h d my 6ther' ' .
'. p d e s b~volvedwiih this matter, We also E&direct V&E' to ptxforrn hdditional. .-.. .
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. .hvestigsti~eproccdur~snwo
deem Lecessivy... Should w= deem it necessary we .
. &@.also retain legal cdunsel. . We will .attcmpt.'mt to d~~lica&',wo~k
thtd has . . . - - :
. . , aIr&y been perfore&..unless.webelieve that additional work needs to. be 'done
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- to cbmplete, our investigation a$ provide KPl$G with evidence they require in , . . . .
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' or& tb issue d opinion &L tb&.fiumcial
'statements. . A Iack'of:
access
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i a f O r ~ t i d f'pr
i pmsom1' we "equifeemay idpact out ability to qdiplett our
in+estigation a d ability to:complete this project' .' . .
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. We will repont o& tindings to Ithi CQ&.
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work'will be %wed on thd investigation reports and any additional .prhcedmes
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dkem &&-esaary.. Howeve, we are not re$~nsiblrfor.tbe work performed by V&E or the .
. civ A&*~~,. We am dso not i~poasiblpfor the issum& o f auditid .statements I
y .'. . . . . ..
= K'MQ &j any itlid.e$tmalaCoo&ting
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y
hired
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quest& a sepnd. phass tq our engagement, w&ih-wo will nbt be
, . ptcpqd to m-tnce
until thb fist p h e is o~mplet,Iothe stcond phase, we &ay be :
mgjged 'io
wasult with pmome1. d the Cit)! to establish ktemal.doritrdls that if .
implemmted md pierated pmp'~1'~t.
by ths City could provide rqasonable'assmapiethat:.
. . 'fie &sactiob identified in
rqortn in p b e one are properly sported mil +siloged
in &=&ankid stateqcpts of the City. . We eduld coordinate our ~ork'with'thecity
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'Auditor a6a ~d&~6oller,
the h&..of the hternal audit department @ tho Ciry'sbutside
. . that hate-C ~ Q
. .. .ind&s~.dentbwditors. +.to .the ?copeahd nat;ue of the i n t d oonttgls
. . '&uld nmd to assess, ';fo&ent, .imx,~em~t
and test. .
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'The ci&'s
cbm-01'over &a.yial repoi&g includesathosepo~&s and prooad1;3:es
''.that p&ain to jtcl abiIily to i&ab, record, process and rew* f m i d ,daigt consistent
. , with the-ksertiom embodied ii eitha .its annual or htgrim fmaicial. ~tikmk&ts
a c e s y i n g disclosies. Managernmi of the Citg i s respomible for. evaluating thi
_eff'd~&e~s b f - -- ~~ o ? n ~ a nintern$'
~ ~ s . control: ovsi f i n m I F q o m b g net
Uitab1~
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&teri,k md su$portidg i& ,aSSessrnent w
a
i suEcient cvidenwYcIuding:.
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dgcmZl;niationi. . ~ a n a g & c t . will also be resppasible for presenting .a .written:
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The .work p&forined in io&&tion with phase p r i ~'and twcj ck th* project w3.l be ..
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d
~5th&6. applipable prof~%sidnelstqdards, .fox consuI&;ts, _
se$. ,
faah byhe Am~dcahInstitute of C
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~he'c~&Cil
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that a& wriotei reports, .gcheddeg, nq&
mit'erials, or ~ o c u & ~..~ ~ s . .
prq&d 'or prbvided by'Kmll are to Se used ,only for this matter and.wiU not be . .. . .
disclosed, bI;Mished, or use6 by t& Council or &y ircpnseqktives
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otxer purpose ivithout KrbLZ's pior w$I?en
pen%ssion
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KPMG L V
Three ~rnbarm&roCenter
Telephone 415 951 0100
San Francisco, CA 9494917
October, 11,2004
Leslie J. Girard, Esq.
Assistant City Attorney
Office of the City Attorney
City of San Diego
1200 Third Avenue, Suite 1620
San Diego, CA 92 101
RE:
CITY OF SAN DIEGOFISCAL YEAR2003 AUDIT
Dear Mr. Girard:
As shared in previous meetings and correspondence, including our letters dated August 9,2004
and September 1,2004, we do not believe that the City of San Diego ("City") has conducted an
adequate investigation in order to conclude that likely illegal acts have not occurred, or that
appropriate remedial action has been taken. Such an investigation is necessary in order for an
.auditor to complete an audit in accordance with generally accepted auditing standards and
Government Auditing Standards.
The primary purpose of this letter is to express KPMG's position on what additional action KPMG
believes the City should take relating to the investigation and remediation of potential illegal acts
to enable KPMG to complete its audit of the City's basic and fund financial statements for the
fiscal year ended June 30,2003. KPMG has been concerned that the City was not undertaking an
investigation specifically designed for the purpose of addressing audit responsibilities under
generally accepted auditing standards and Government Auditing Standards relating to possible
illegal acts. At the City's request, and as reflected in our September 1,2004 letter, KPMG agreed
to await the completion of the Virison & Elkins ("V&En) report (the "Report"), to review the
Report, and to advise the City as to what, if any, further information KPMG required in order to be
in a position to complete its audit and issue its audit reports. As discussed, and as explained in
more detail below, our overriding concern has been and remains, that an investigation must be of
sufficient scope and thoroughness to provide a sound basis for concluding either that illegal acts
with relevance to the City's financial reporting have not occurred or that appropriate remedial
action has been taken with respect to any conduct which the City and its counsel cannot
definitively conclude was legal.
At your request and to make our next meeting as constructive as possible, we have attempted in
this letter to synthesize what additional action we believe the City needs to.take to enable KPMG
to complete its audit, and also to explain in general terms why this additional action is necessary.
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Mr. Leslie J. Girard
Assistant City Attorney
Office of the City Attorney
City of San Diego
October 11, 2004
Page 2
BACKGROUND
We understand that the SEC is conducting a formal investigation of the City of San Diego's public
disclosures relating to the SDCERS in the City's bond offerings during the period 1996 through
January 2004. This investigation was commenced following the City's filing of a Voluntary
Report of Information on January 27,2004 with the Municipal Securities Rulemaking Board and
the Nationally Recognized Municipal Securities Information Repositories. That Voluntary Report
made new disclosures regarding the City's obligations to fund the SDCERS and also disclosed
that there had been errors in the City's 2002 CAFR.
We also understan'd that the U.S. Attorney and FBI are conducting a criminal investigation
relating to the City's pension funding and disclosures. There have also been press reports of an
additional investigation by the FBI relating to possible "public corruption7'issues relating to the
process by which the City and SDCERS have negotiated and approved various agreements in
which the City's obligations to make payments to fund SDCERS were reduced and/or deferred in
exchaGge for agreements to increase or expand benefits.
We understand that all of these investigations are focused on the conduct of individuals who either
are currently employed by the City, were employed by the City during the period covered by
KPMG7songoing audit, or were acting in some manner on behalf of the City or SDCERS during
the relevant time period.1
V&E was retained by the City and conducted an investigation into the City's disclosure practices
and prepared a report. The V&E Report, which was made public on September 16,2004, describes
systemic failures in the City's financial reporting and disclosure processes related to the SDCERS
pension plan. See e..g., Report at 170-171 (referring to "across the board failures of the City's
internal disclosure processes.") It also reflects that, as late as the fall of 2003 the City's Disclosure
Counsel thought information was being withheld from him and there were fundamental
disagreements about whether acknowledged errors in the historical financial statements were
material. Report at 114-120. The Report acknowledges that the City's prior SDCERS related
disclosures were inadequate, and while it appears to stop short of concluding that there were
material misstatements in the City's disclosures, it describes a dysfunctional disclosure system and
also comments upon the City's "minimalist approach to public disclosure." Among the
observations supporting this conclusion is the statement that "the City Auditor was disinclined to
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Potential illegal acts by SDCERS or its board are relevant to KPMG's audit. Your position (expressed in
the September 20,2004 letter), that SDCERS is an "entity independent of the City," does not address the
fact that the financial condition of SDCERS is reported as a fiduciary fund in the City's CAFR.
Mr. Leslie J. Girard
Assistant City Attorney
Office of the City Attorney
City of San Diego
October 1 I, 2004
Page 3
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include information in the City disclosure that reflected badly on the City and would sometimes
excise negative statements fiom disclosure documents." Report at 117.
The V&E report includes two paragraphs under a heading "Conclusions Regarding Intent." Report
at 164. These paragraphs state that because many of the "gaps" in the City's disclosures are
"closed" when information in the SDCERS CAFRs is considered and because local press coverage
of the pension plan highlighted many of the risks surrounding the more controversial City funding
agreements (Managers 1 and 2) and the presence in the Municipal Code of the menu for
distribution of surplus earnings, any attempt to conceal the SDCERS funding situation would have
been an "exercise in futility."
While we understand that V&E has concluded that it has gathered sufficient evidence to support
this conclusion, for purposes of our audit, we note that this conclusion does not address the
questions we have posed as being important to our completion of our audit, and therefore, does not
end our inquiry. Indeed at our meeting on August 27,2004, Both the City and V&E have made it
clear to KPMG that V&E was not retained to investigate issues relating to intent or whether any
individual's conduct violated any law, rule or regulation, and that the scope of its investigative
efforts were not designed to do so. At that meeting, we informed the City that, in the absence of
conclusions on such issues, KPMG anticipated advising the City that additional investigative
procedures may be necessary before KPMG would be in a position to complete its audit; and, in
turn,we were advised that the City would perform any additional inquiries that KPMG believe
were necessary for it to be able to conclude on issues that might affect its ability to issue an audit
opinion.
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Unfortunately, based upon the information we have been provided to date regarding the scope and
method of the V&E investigation, we do not believe the statement in the report that "it is difficult
to attribute the City's failure to fully and accurately describe [pension] matter[s] to intentional
misconduct on the part of individual employees" is sufficient to resolve the issue of potential
illegal acts for purposes of KPMG's audit because it is not based on an investigation that had a
scope and methodology that would provide a reliable basis for reaching a conclusion as to whether
City officials engaged in intentional misconduct or other conduct, which violated any law, rule or
regulation having the force of law.
It is in this context and against these background facts, that KPMG's requirements, as outlined in
this letter, must be understood. Most fundamentally, because there is evidence of possible illegal
acts by the City or persons whose acts are attributed to it, under Generally Accepted Auditing
Standards (GAAS) and Generally Accepted Government Auditing Standards (GAGAS), as well as
other relevant professional guidance, to the extent the following questions are not directly
Mr. ~ e s l iJ.e Girard
Assistant City Attorney
Ofice of the City Attorney
City of San Diego
October 11,2004
Page 4
addressed in the V&E Report, additional investigative procedures are required in order to
determine if illegal acts are likely to have occurred, to assess the direct or indirect effect of such
acts on the City's financial statements as well as the implications for the reliability of
representations being made by City employees to KPMG in the course of aur audit, and to
determine if any such illegal acts have been adequately remediated by the City.
The report based on such an investigation must include clear conclusions and be supported by a
thorough investigation. However, as stated above, and as KPMG has been advised, the V&E
investigation was not conducted as a forensic investigation, and did not result in a report that
reached clear conclusions about whether federal securities laws (or any other relevant laws) had
been violated, did not explore potential individual conduct that may be fraudulent or unlawful, and
thus does not provide a basis for determining potential financial statement effects or determining
KPMGYsability to rely on management representations from the City.
Further, the Report's discussion of certain evidence raises a concern that the investigation, for our
purposes, did not adequately follow up on evidence which might suggest that certain of the
deficiencies in financial reporting may have been the result of conscious efforts by one or more
persons at the City. In the absence of an investigation and report that adequately explores these
issues, it is not possible to determine if the City has taken appropriate remedial measures or if the
representations made to us during our audit by certain individuals can be relied upon by us in
reaching our opinion on the financial statements. 2
In this regard it also bears noting that the remedial measures recommended in the Report are all
prospective and entail structural reforms to address the City's process of disclosure in the future.
These reforms are subject to approval by the City Council and, even if adopted, would have no
impact on the manner in which the City will have prepared its 2003 audited financial statements.
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See Report ofInvestigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and
Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions Exchange Act
Release No. 44969,2001 SEC LEXIS 2210 (Oct. 23,2001), arising out of an investigation into financial
,reporting by Seaboard Corporation.
Mr. Leslie J. Girard
Assistant City Attorney
Office of the City Attorney
City of San Diego
October 1I, 2004
Page 5
OVERVIEW OF RELEVANT AUDITING AND ACCOUNTLNG REQULREMENTS
AICPA State and Local Audit and Accounting Guide 5 4.44.
J1) Illegal Acts with Direct and Material Effects on Financial Statement Amounts
GAAS requires an auditor to plan and perform an audit to obtain reasonable assurance about
whether the financial statements are free of material misstatements arising from illegal acts that
have a direct and material effect on the determination of fmancial statement amounts. The
auditor's consideration of those potential misstatements is a matter of professional judgment and is
influenced by his or her perceptions of the needs of a reasonable person who will rely on the
fmancial statements.
The professional literature identifies the following types of legal compliance requirements as
among those that may have a "direct and material" effect on the determination of fmancial
statement amounts.
G M Requirements. Governments often are subject to legal or contractual
provisions that require them to prepare their financial statements in conformity
with GAAP.
Federal and State Taxes. Governments are subject to various federal tax
requirements, including those relating to employment taxes, employee benefits,
and tax-exempt debt (such as arbitrage rebate requirements). State-level tax
requirements also may apply.
(2) Illegal Acts With Indirect Effects on Financial Statements
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The auditing literature also recognizes that Governments often are affected by many other laws or
regulations, which generally relate more to an entity's operating aspects than to its financial and
accounting aspects, and that the financial statement effect of those laws and regulations is
"indirect". Although an auditor is not required to plan the audit to detect noncompliance with such
laws and regulations, the auditor does have certain detection, consideration, and reporting
responsibilities relating to potential violations of such laws, which require the auditor to insist that
when potential violations of such laws come to light, they must be investigated.
)
Moreover, GAAP requires a government entity, such as the City, to disclose in its financial
statements material violations of fmance-related legal and contractual provisions. Accordingly, the
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Mr. Leslie J. Girard
Assistant City Attorney
Office of the City Attorney
City of San Diego
October 11,2004
Page 6
auditor of a governmental entity is alert to the possible financial reporting effect of noncomplianc e
with law that has a material indirect effect on financial statements. Because the government entity
itself has financial statement reporting obligations related to violations of such laws, the
government and the auditor both have a shared interest in assuring that when potential violations
of such laws come to light, they are fully investigated so that the financial statements can include
required disclosure.
the GAAP~
In considering whether the financial statements are free of material misstatements arising from (1)
illegal acts that have a direct and mate rial effect on the determination of financial statement
amounts, or (2) illegal acts that have an indirect material effect on financial statements, the auditor
should consider both quantitative and qualitative factors. Qualitative factors that the auditor may
consider relevant to that evaluation include the following:
The potential effect of the noncompliance on the government's ability to raise
resources (for example, through taxes, grants, contributions, or debt or loan
financings) in the future.
<
The potential effect of the noncompliance on the continuation of existing
relationships with vendors, employees, and elected and appointed'officials.
Whether the noncompliance involves collusion or concealment.
Whether the noncompliance involves an activity that often is scrutinized by
elected or appointed officials, citizens, the press, creditors, or rating agencies.
Whether the fact of the noncompliance is unambiguous rather than a matter of
judgment.
Whether the noncompliance is an isolated event or instead has occurred with some
frequency.
GASB standards require governments to disclose certain violations of compliance requirements. NCGA
Interpretation 6, Notes to the Financial Statements Disclosure, paragraph 4, states that the notes to the
financial statements should disclose material violations of finance-related legal and contractual provisions.
In addition, material violations, or potential violations, of finance-related legal and contractual provisions
should be considered for recording a loss contingency. Id.at $4.48.
Mr. Leslie J. Girard
Assistant City Attorney
Office of the City Attorney
City of San Diego
October 11,2004
Page 7
Whether the noncompliance results from management's continued unwillingness
to correct internal control weaknesses.
The likelihood that similar noncompliance will continue in the future.
The cost-benefit of establishing internal control to prevent similar noncompliance
in the future.
,,
The risk that possible undetected noncompliance would affect the auditor's evaluatioa4
Finally, an auditor is required by applicable auditing standards to "consider the implications of an
illegal act in a relation to other aspects of the audit, particularly the reliability of representations of
management." AU fj 3 17.16. In considering such issues, the auditor must be provided with
sufficient information relating to the potential illegal acts to exercise professional judgment
concerning the implications of a particular illegal act for the audit. Id.("The implications of
particular illegal acts will depend on the relationship of the perpetration and concealment, if any,
of the illegal act to specific control procedures and the level of management or employees
involved.") Our April 13,2004 engagement letter allows KPMG to make such a determination as
to the sufficiency of the investigation for audit purposes.
LNFORMATION AND REOCRDS REQUESTED, NOT YET PROVIDED
There are several open items which have been promised, but not yet provided to KPMG.
KPMG has yet to receive all V&E interview notes, memoranda and supporting
documents as requested. The basis for this request is outlined in our engagement
letter.
KPMG needs information concerning the scope and status of the criminal
investigation(s), which we understand V&E is not handling. We will need to
speak with the attorney representing the City in those matters.
ITEMS REQUIRING RESOLUTION BY THE CITY
.
Based on our review of the V&E investigation and Report, and in light of the auditing standards
discussed above, KPMG has attempted to synthesize the issues that remain, which must be
Id. at § 4.46
-
Mr. Leslie J. Girard
Assistant City Attorney
Office of the City Attorney
City of San Diego
October 11,2004
Page 8
resolved before we are able to complete our audit in accordance with generally accepted auditing
standards and Government Auditing Standards. They are as follows:
The City needs to determine whether the City's public disclosures, including its
financial statements, likely violate the antifraud provisions of the securities laws
(% failure to disclose pension related matters) or any other Federal, State or
local laws, and if so, what, if any, impact is there to the June 30,2003 fmancial
statement amounts and disclosures? The report from the investigation team should
include clear conclusions (with adequate support for such conclusions) whether an
illegal act has occurred and whether such illegal act has been timely and
adequately remediated. The report and investigation must be in sufficient scope
and detail to allow us to reach our own conclusions as to (i) whether it is likely
that an illegal act has occurred and, if so (ii) whether any likely illegal act that is
identified will have a material effect on the entity's financial statements and, if so
(iii) whether timely and appropriate remedial action has been taken. Closely
related to this set of issues is whether City employees or agents have engaged in
fraudulent actions including concealment, related to the potential illegal acts. The
City needs to investigate and determine, and report to us, the relationship of the
perpetration and concealment, if any, of likely illegal acts to specific control
objectives and the level of management, employees, or consultants involved.
The scope of the investigation needs to extend to all possible illegal acts and
needs to expand, as necessary, based on findings made during the investigation. In
other words, the investigators should be able to pursue all evidence of possible
illegal acts no matter where they may lead.
According to the Report, retiree healthcare benefits were paid directly out of the
pension system from 1983 until 1992 when a determination was made that this
violated federal tax regulations. A new system was set up which was also
determined to be legally flawed in 1995, which was addressed by making
payments a SDCERS benefit. While the Report compiles facts relating to this
violation, and concludes that the funding method was violative of federal
regulations, it does not address the possible conseq;knces of this violation. What
has the city done to consider and address the fmancial statement impact of
possible IRS sanctions, or other contingent liabilities or disclosure obligations
arising from the conduct that could impact the June 30,2003 financial statement
amounts and disclosures?
Mr. Leslie ~ . ' ~ i r a r d
Assistant City Attomey
Office of the City Attomey
City of San Diego
October 11, 2004
Page 9
The issues from our August 9,2004 letter must be addressed (see discussion in
Exhibit I)
We look forward to meeting with the City to discuss further how the City can conduct an adequate
investigation in order to conclude whether it is likely or not illegal acts have occurred, or that
appropriate remedial action has been taken.
Very truly yours,
W M G LLP
Steven G. DeVetter
Partner
cc:
Mr. Dick Murphy, Mayor
Mr. P. Lamont Ewell, City Manager
Ms. Terri Webster, Acting City Auditor and Comptroller
Exhibit I
Specific Comments Regarding September 20,2004 City Response to KPMG's August 9,
2004 Letter
Attachments:
April 13,2204 Engagement Letter
August 9,2004 Letter from KPMG Re: Investigation
September 1,2004 Letter from KPMG Re: Follow-up from meeting on August 27,2004
September 20,2004 letter from Les Girard Re: City of San Diego Fiscal Year 2003 Audit
Exhibit I
Page 1 of 6
SPECIFIC COMMENTS REGARDING SEPTEMBER 20,2004
CITY RESPONSE TO KE'MG'S AUGUST 9,2004 LETTER
In your letter, you conclude by stating your view that the V&E Report "is sufficiently
comprehensive to allow EPMG] to reach the conclusions necessary for compliance with Section
AU53 17 of the AICPA Professional Standards and for the issuance of [KPMG's] audit report."
For reasons previously articulated and expanded upon below, we are unable to agree with that
conclusion.
As in many aspects of auditing, the conclusions involved in determining that potential illegal acts
have been adequately investigated and remediated is one that entails an auditor's exercise of
judgment. However, in the instant case, we believe that the issue is sufficiently clear that an
informed and diligent auditor should not conclude that the V&E report adequately addresses the
issues necessary for the completion of KPMG's audit. The Report may satisfy the City's needs (a
conclusion we defer to the City to make); but, without more, it does not provide a sufficient basis
for KPMG to conclude that all questions necessary to the completion of the audit have been
sufficiently investigated and resolved in a manner that would permit KPMG to issue an audit
report.
In response to your letter, we offer the following comments.
KPMG's Question 1
Whether or not the financial statements and or the disclosures in the financial statements were
intentionally misleading and, if yes, what individuals were involved and what, if any, remedial
action is recommended?
City's Comment on Question 1
Your comment seems to make two essentials points. First, that with the departure of the City's
prior independent auditor and the departure of the City Auditor and Comptroller, there is no need
for an investigation into whether there were any intentional illegal acts relating to the City's
underfunding of the SDCERS pension plan andlor financial reporting related thereto. Secondly,
your comment seems to imply that the comments in the V&E Report at page 159 concerning the
possible intent of City officials to allow the City to issue misleading fmancial disclosures should
be sufficient for KPMG in the absence of KPMG's ability to cite you to investigative reports for
municipal issuers or other issuers that address the issue of intent in a manner that goes beyond the
V&E Report.
Response to City's Comment on Question 1
The subsequent departure of Mr. Ryan does not change the fact that, for the entire period KPMG
is auditing, he was ultimately responsible for supei-vising the preparation of the City's financial
Exhibit I
Page 2 of 6
statements. Moreover, numerous individuals were (and remain) involved in the financial
reporting process at the City, including individuals who, according to the Report, may have been
involved in the disclosure deficiencies criticized by the Report.
Under AU 3 17.16: "The auditor should consider the implications of an illegal act in relation to
other aspects of the audit, particularly the reliability of representations of management. The
implications of particular illegal acts will depend on the relationship of the perpetration and
concealment, if any, of the illegal act to specific control procedures and the level of management
or employees involved."
Both the City and V&E have made it clear to KPMG that V&E was not retained to investigate
issues relating to intent and that the scope of its investigative efforts were not designed to do so.
Based upon what we have been told about the investigation, we do not believe the statement in
the report that "it is difficult to attribute the City's failure to fully and accurately describe
[pension] matterrs1 to intentional misconduct on the part of individual employees" is one that can
be relied upon to resolve the issue of potential illegal acts for purposes of KPMG's audit because
it is not based on an investigation that had a scope and methodology that would provide a reliable
basis for making such a conclusion.
KPMG's Questions 2
Did the City enter into any agreement, including the "Managers Two" agreement, or otherwise
take any actions that resulted in the underfimding or misuse of pension funds that is a violation of
State, City or other laws?
City's Comment on Question 2
Your comment on question 2 makes essentially three points. First, that the City's potential
liability for any violations of law from the alleged underfunding of the pension plan has been
dealt with through the settlement of the Gleason case. Second, you state that there has never been
any allegation that the City's net pension obligation reported in the City's balance sheet has been
misstated. And third, that based on certain legal propositions discussed in the V&E Report at
page 11, the motivations of individual members of the City Council in taking certain action are
not a basis upon which that action may be voided by the courts.
Response to City's Comment on Question 2
On point 1,GASB standards require governments to disclose certain violations of compliance
requirements. NCGA Interpretation 6, Notes to the Financial Statements Disclosure, paragraph 4,
states that the notes to the financial statements should disclose material violations of financerelated legal and contractual provisions. In addition, material violations, or potential violations, of
finance-related legal and contractual provisions should be considered for recording a loss
contingency. Accordingly we do not believe that only considering the loss contingency is
sufficient in these circumstances. Additionally, the considerations in AU 5 3 17.16 need to be
addressed in the context of this question.
Exhibit I
Page 3 of 6
On point 2, The reported June 30,2002 $39 million net pension obligation was misstated due to
the payment of retiree healthcare benefits from the pension plan. At KPMG's suggestion, The
City has calculated the corrected June 30, 2002 net pension obligation to be $103 million. The
considerations in AU 8 3 17.16 need to be addressed in the context of this question. The City
needs to investigate and determine the relationship of the perpetration and concealment, if any, of
likely illegal acts to specific control objectives and the level of management, employees, or
consultants involved. For example, V&E states that a letter fiom the Actuary to Mike Phillips in
1998 highlights knowledge of potential errors in the financial statements that were not
changedlcorrected until recommended by KPMG for the June 30, 2003 financial statements:
"All these number presuppose that the 1996-97 is the first year in which the
calculated actuarial contribution is greater than the actual contribution. You made
an excellent point a year ago that this may not be the case. This issue may go
back close to a decade after the use of 'bifurcated' rates was implemented. The
case could be made that the City has a Net Pension obligation".
Finally, on point 3, while the legal proposition to which you refer, while may be relevant to
whether a court will decline to question the motivation behind proper legislative action for
reasons grounded in separation of powers, we do not believe that such a consideration alters the
nature of the our responsibilities as the City's independent auditor, nor the need for the City to
perform additional inquiry before determining whether an illegal act has (or has not) occurred,
and if so, that it has been appropriately remediated.
KPMG's Questions 3
Did the SDCERS Board breach their fiduciary duty by allowing the City to underfund the plan in
exchange for additional benefits for current employees and could this action have been in
violation of any laws?
City's Comment on Question 3
Your comment on this item is essentially that the SDCERS board is independent of the City of
San Diego and based on that you question why the actions of SDCERS or the members of its
board "relate to" KPMG's audit.
Response to the City's Comment on Question 3
The basic financial statement of the City consist of (a) the primary government, (b) organizations
for which the primary government is financially accountable, and (c) other organizations for
which the nature and significance of their relationship with the primary government are such that
exclusion would cause the reporting entity's financial statements to be misleading or incomplete.
The definition of the reporting entity is based primarily on the notion of financial accountability.
A primary government is financially accountable for the organizations that make up its legal
entity. It is also financially accountable for legally separate organizations if its officials appoint a
Exhibit I
Page 4 of 6
voting majority of an organization's governing body and either it is able to impose its will on that
organization or there is a potential for the organization to provide specific financial benefits to, or
to impose specific financial burdens on, the primary government. A primary government may
also be financially accountable for governmental organizations that are fiscally dependent on it.
The City's basic financial statements include SDCERS, and any audit opinion issued by KPMG
reporting on the City's basic financial statements would,'therefore, cover SDCERS. Accordingly,
financial accounting and disclosure of activities occurring within SDCERS are relevant to our
audit under GAAS and GAGAS.
KPMG's Question 4
Is the use of surplus earnings to pay city obligations such as benefits outside of the plan illegal?
City's Comment on Question 4
Your comment refers us to the history of the surplus earnings issue as discussed in the V&E
Report.
Response to City's Comment on Question 4
According to the Report, retiree healthcare benefits were paid directly out of the pension system
fiom 1983 until 1992 when a determination was made that this violated federal tax regulations. A
new system was set up, which was also later determined to be legally flawed in 1995, which was
addressed by making payments a SDCERS benefit. Report at 36. This underscores, rather than
arneleorates our concerns. We must understand what the City has done to address possible IRS
sanctions, and also learn what the possible impact is to the City's June 30, 2003 financial
statement amounts and disclosures. Additionally, we believe that the considerations raised by AU
5 3 17.16 need to be addressed in the context of this question.
KPMG's Question 5
Did the City violate the City Charter by failing to fund its retirement plan as required by the City
Charter?
City's Comment on Question 5
Your comment on this question refers us to the fact, discussed above, that the City believes that
the Gleason settlement "resolves the economic consequences" of the City's actions and thus,
suggests that any issue with respect to whether that conduct was unlawful is irrelevant.
Response to City's Comment on Question 5
Potential liabilities are one reason violations of laws are relevant to an auditor. Because GAAP
require governments to disclose material (whether quantitative or qualitative) violations of
-
E-x-hibitI
Page 5 of 6
--
fmance-related legal and contractual provisions, the auditor of a governmental entity should be
alert to the possible financial reporting effect of noncompliance that has a material indirect effect
on financial statements. Additionally, KPMG believes that the considerations of AU 3 17.16 needs
to be addressed in the context of this question.
KPMG's Question 6
Did the SDCERS Board and/or the City violate the California Constitution by allowing the City
to intentionally underfund the plan?
Citv's Comment on Question 6
Your comments in this section refer to your earlier comments relating to Question 2 and Question
3.
Response to City's Comment on Ouestion 6
Please see our comments above regarding these items.
KPMG's Question 7
Was undue influence placed on the actuary to change assumptions to reduce the shortfall of the
City's contribution compared to the Actuarial Required Contribution (ARC), and, if yes, at whose
direction and what action does the City plan to take to rectifjr this action, if applicable?
City's Comment on Question 7
Your comment on this item refers us to the discussion at page 91 of the V&E Report and asks for
the details of any remaining concerns.
Response to City's Comment on Question 7
The auditor should consider the implications of an illegal act in relation to other aspects of the
audit, including the reliability of representations to be obtained from members of management.
The implications of particular illegal acts will depend on the relationship of the perpetration and
concealment, if any, of the illegal act to specific control procedures and the level of management
or employees involved.
The City needs to investigate and determine the relationship of the perpetration and concealment,
if any, of likely illegal acts to specific control objectives and the level of management,
employees, or consultants involved.
,
Page 6 of 6
Other Issues Raised in the City's September 20,2004 Letter
Your letter also commented on electronic discovery. With respect to electronic discovery, both
the City and V&E have made it clear to KPMG on August 27,2004 that V&E was not retained to
investigate issues relating to intent and that the scope of its investigative efforts were not
designed to do so. We believe that determining intent is required with respect to certain of the
questions posed in our August 9 letter, and electronic discovery is an effective procedure in that
regard, as it may provide relevant evidence for the City, its counsel, and KPMG to consider in
determining whether there are unresolved questions which might affect the City's fmancial
statements or disclosures.
'
Three &barcaden, Center
San Francisco, CA 94111
. .
Telephone 415 951 0100
October 29,2004
The Honorable Dick Murphy, Mayor
Mr. Lamont Ewell, City Manager
City of San Diego
1200 Third Avenue
San Diego, CA 92101
'
-
Gentlemen:
We write this letter in an earnest attempt to make progress with the City of San Diego towards
addressing the issues that must be resolved before KPMG can complete its audit of the City's 2003
fmancial statements.
I
The immediate topic we must address is the letter dated October 28,2004 from Paul Maco of
Vinson & Elkins (V&E) addressed to Les Girard, Assistant City Attorney. That letter, which
appears to have been posted immediately on the City's website, in our opinion seriously impairs, '
rather than advances, the prospects for a prompt resolution of the issues that currently stand in the
way of KPMG completing its audit.
/
We will not in this letter seek to correct all of the statements in Mr. Maco's letter which we believe
are inaccurate. However, we do wish to convey to you, as two individuals with significant
responsibility for the City's affairs, several points, which are intended to be direct, but constructive:
First, KPMG cannot, and will not, ~~anplete
an audit of the 2003 financial statements unless the
City completes an independent investigation of potential illegal acts as we have outlined'in our
prior correspondence.
Second, KPMG does not seek, as Mr. Maco asserts, "broad and unspecified assurances that the City
and its officials have not committed 'illegal acts.' " Nor do we request that the City retain counsel
to "speculate on an unbounded universe of unasserted claims." We believe that our prior letters
cannot reasonably be construed to have made such requests. To the contrary, we have laid out what
our concerns are, and repeatedly advised the City's representatives that these concems must b e
addressed through an investigation that was designed to develop facts that would enable the City
and its counsel to address those concems.
Third, while we believe it is somewhat unusual for an auditor to provide a detailed explanation to a
client of the auditing standards that justify an auditor's request for information, we have done so
here. In our correspondence, we not only discussed relevant auditing literature, but also explicated
for the City some of the applicable accounting principles that require the Citv in its fmancial
KPMG. LCP KPMG LLP. a llmlled llebllllypaiinernhlp,Is
a rnnrnber of KPMG InternaUonsl,a Swlns assoclallon.
-
&Prn
.
The Honorable Dick Murphy, Mayor
Mi. Lamont Ewell, City Manager
Citypf San Diego
October 29,2004
Page 2
statements to make disclosures of any violatiolls of finance-related laws and regulations.' W e
believe that the City cannot comply with this requirement unless it conducts the kind of
investigation we have requested and described in our October 11,2004 letter. Accordingly, the
investigation we are requesting is one that the City ought to desire to complete so that it can
discharge its own financial reporting obligations and not solely because K ~ M G
is insisting that it
do so. The City, as the issuer of its fmancial statements, must conclude on the question of whether
any of the issues disbussed in our October 11,2004 letter and its attachments and the conduct
discussed in the V&E report was illegal and, if so, whether any violations must be disolosed, and
have been adequately disclosed, in the fmancial statements in accordance with G W . We would
further expect the City would also determine to its satisfaction that all necessary and appropriate
remedial actions have been taken with respe~tto on duct that is investigated. It is because it is the
City's obligation to reach these conclusions thak KPMG has suggested that the City obtain from its
investigators sufficiently clear legal conclusions to enable the City to make the necessary
determinations; we have not, as Mr. Maco suggests requested that any law fm issue a legal
opinion to KPMG on any subject and his allusion to the ABA protocol for FAS 5 (Contingent '
Liability) attorney letters is completely off subject. It is, thus, extremely disappointing and
surprising that Mr. Maco's letter so ardently contends that KPMG has not explained the auditing
standards motivating its request. It is equally troubling that his letter erroneously asserts that
KPMG "was not following established auditing standard^."^
In light of the foregoing, and considering both that Mr. Maco may not speak for the City on these
matters and that (at least according to certain press reports) there may not have been adequate
communication within the City about our position, we believe that a key element of qur meeting on
Monday November 1,2004 will be to secure the authoritative position of the City on these
important issues. Our fundamental goal for this meeting is the same one we expressed in our letter
dated October 27,2004: "to discuss how the City plans to conduct an adequately detailed
investigation that will permit KPMG to conclude its audit."
If the City is prepared to proceed with an appropriate investigation, then we urge you to consider
retaining counsel other than V&E to do so. The positions asserted in, and oppositional tone of, Mr.
Maco's letter raises questions about V&E's willingness or ability in these circumstances to
complete the investigation of, and reach conclusions on, the audit-uritical questions posed in our
prior oral and written communications and to do so in an objective and independent manner. Our
I In light of these requirements, the fact that the City may be exempt from Section 10A of the Securities Exchange Act of
/'
1934 as Mr. Maco asserts, does not eliminate the City's obligations under Generally Accepted Accounting Principles
("GAAP") applicable to governments.
Again, in the interest of assisting the City in understanding its obligations and explaining the professional guidance that
KPMG believes is applicable here, we are enclosing a copy of a very recent Practice Alert published by the American
Institute of Certified Public Accountants on "Illegal Acts".
i
I
The Honorable Dick Murphy, Mayor
Mr. Lamont Ewell, City Manager
City of San Diego
October 29,2004
reading of the letter suggests to us that, at this point, conducting the kind of investigation that is
necessary maybe in tension with V&E's ongoing representation of the City in the pending SEC
investigation.
KPMG's ability to complete its audit of the City's financial statements is dependent on resolution of these outstanding issues. We have been, and will continue, to perfprrn the service we understood
the City wanted us to perform (i.e. to objectively exercise our professional judgment in the
application of professional standards). We stand ready to do so in the independent manner we
believe the City, the investing public and the taxpayers expect.
Very truly yours, .
/
Steven G. DeVetter
Partner
cc: Mr. Leslie Girard, Assistant City Attorney, City of San Diego
-1
,
) . .
FAX NO. :
FROM :
May. E17 2005 04 :2lPM P 5
.
Members in
'
This Practict: Alerl is intended to provide ptwtitioners with information that may help
thm improve the effectiveness and efficiency of thdr engagements and practices and is
based on existing profossibn~lliterature, the exprience of members of the Pmfessibnal
Issues Task Farce [PIP) and informntion provided by certain NCPA rncmbcr firms tD
thdr own pmfefisiond staff. Tkis informatiov represents. the views of tho members of the
PITP and has not heal approved by any senior technical cornlnittee of the MCPA, The
auditing portion of [his publication is an Other Auditing Public~z~ion
as defined in SAS 95,
Genrralljl Accepzpled Auditing Srandnrds and is intedded to provide ~uidanceto auditors of
nonissuers.'&her Auditing P~thliculiolt~
have no authoritatiye status; however, they may
help the auditor understand md apply Statements on Auditing Standards {SASS). If an
auditor applics tho auditing guidance included in an Other Auditing Pwblicalwn, the auditnr should be satisfiod that, in his or her judginenf it la bath apprnpriate and relevant to the
circutnstances of the subject audit. This plrblicalion was reviewed by the AICPA Audit and
Attcvt Stmhrrls s
M and pul>lishcdby the AICPA, and is prestntled to bc appropriate.
illegal A d s
Intmductisn
?
In April
j
19RX, the Auditing Standwds
~ o a f dlgsued Statemeilt on Auditing
Stand&d& No. 54, illegal Acts by C1ient.f
("$AS 54"). SAX 54 pe~cribtsthe nature
8nd extent of tho considertuion n~ inds
pendent auditor should give to the possibiiity af ilkgttl w t s by ti client in an audit
of financial iltamnents in accordance with
generally accepted auditing standards.
!
/
I
I
1
i
$AS 54 also provides guidance on the
auditor's responsibility when a possible
.illegal
act is detected.
(
ing s~ndatds.However, auditors performing audits in accordance with Govemwnt
Audifing Standads (also refared to ~ 1 6the
'Yellow Book") should also be aware that.
those standards include additional require.
ments related to illegal acts. Auditors
should refer to SAS 74. Cdmpliance
Auditing Consideratiofir ifr Adits of
GovenvncntaE h i t i e s adrReripknzs of
Governmcntat Financial Assistame, and
the AKCPA's Audit Guide, Gwenment
krdhing StuncJards a d Circuhr ,42133
Audits (which has bten updated for the
2003 revisions to Govemenr Auditing
Sldardsl. for additional information m '
illgal act's and the auditor's mpcming .
responsibilities whtn performing sn audit.
nndw Gov@mrnentAuditing Stmlda?d#. .
SAS 54 i s the primary ).sourreof guidafice
with respect to the auditor's consideration
of the possibility of illegal .acts by n clienr !
in ad audit of finuncitll statements in
accordance with generally nccepted audit- I $AS 54 defines illegal acts as violations
i
I
.
Nuniplrucr refors to any mtity orlw lhan an "issutr:'The ~ ' ' i ~ u e r is
Uk
Cii
Td
' in Secdoti 2oCrhc Srabtmcs-bxlcy
Act as :
An i~sm'rur
& f i t 1 4 in Sectiw 3 ul tht kuriries k c h p A$ of 1934, thc k u l i ~ w
d which urn xegistered mmdu
Stction 12 of that A& ot thilr is r u l u i ~ dlo 5 1 ~
under Scction l y d ) [of the F~~tr?hungc
Act] m k t film bt
hus filed a,rcgistrulon4rarelnmL
b s nrrk ye\ bccwnc effwrivi uidcr thc Smnritier Am n( 1933, rmd thait hna
not withcftawn. IYn~hetiml
nfuencw to the United StatCR Cadc omiaad].
FROM :
FRX NO. :
May. 07 2m5 04 :31PM
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.
,
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.
of laws or g~;ernme~t reyiuioas. Additionally, the AICPA.8 The audbfs msporsibiMy fn ddmm
Audit Guide, GownuneM Auditing Standrrrdr and Cirnular A. I jllega[ a& haGq m in&& eftect
&e
133 Audits, states that it gtncmlly has been interprcled undcr
I financial skaternewts
GAAS that the term laws and regulations in SAS 54 implicitly
includes provisions;of conmcts or grant agreements,Illegal acts I The ftuditdr Ixiu no direct responsibility to detect and repafl mi&by chats am acts attributable to the entity whose fimmcizl state. : statements resulting from illqnl aots having an indirect effecton
rnents ;tre under audit or acts by management ar employees act.the ftnitncid statements (hcrenfk~m f e d to as "indirect effect
ifig on behalf of the cntity, Illegal acts by cliats do no[ include
illcgd acts") as t h auditor
~
does riot ordinarily have a sufficient
personal misconduct by the entity's personnel unrelated to their I basis fc>rrecognizing pssihle violations of laws and regulations
j that have only m indirect effect on the financial stettmcnts. "hc
business activities. .
I audilor's responsibility is limited ta applying auditing procedures,
Illegal acts are divided into two categories; 1) thosc having a j to such acts that come to the audibr'b attention and being aware
direct and material effect on financial statement amounts and
thn~such acts may exist. However, if specific information
2) those having only an indlrett effect on the financial S M ~ G to thc ~ u d i t ~ rattention
's
regarding the existence of possible hdments. Some laws and egulaEions have a direct and matcrial rcct effect illegal acts, the auditor should apply audit p m c a l ~ m
effect on financial statement amounts. For example, tax laws ] to determine the potentid bfftctx d thc possible indirect effect
ille~nlmt on the financial swments.
affect accruals and the amount recognized as expense in the
an
i
,
.
accounting period; applicable laws and reflations may affect ;
the m ~ u n tof rtvcnut: accrucd undcr govmmmt contmcts. I Afi#d pmc&im in the a&nm
s d c
,
0 t h IRWS
~
md reyiatiionr, such as occupational safety
infOiatiQni ~ ~tha ~ f i mibk
~
health, food and drug ndmhifitration, envimnmetltal pmt!Xti~tl,
quo1 employment oppoxr~inity,.and hnlitnlst violatjons, may j illegal a&
; The auditor should perform the audit with an attitude of profahave only an indirect effect on the fmmcial statcrn~nb.
I ~ i o n dskepticism, remaining alert to conditions or events that
indicate illegal acts may have accumd. P m c e d u ~applied
~
for
?ur&rrg ROwngiwr# fm d u a n of ill*
I
the
purpose
ol
forming
an
opinion
on
the financial. sEateinents
dkd On
baing a
may bring porriblc illrgal act& tu the auditor's attenticia
the financial &demenb
I
Considl;~auonsas to whether an act is illegal, or ot'doubtfu~~egal.
.
"
'.
The auditar must consider'laws and regulations that are generality, nre frequently o u ~ i d ethc auditor's ;xpcrtise, therefom, the , '
ly recognized to have a direct and material. effect on-thefhunoiul I nuditor should consider conoulting with legal counsrA,
.
Additionally, k w s and regulations can also vary.cansiderably in
stntementfi. However, the a\ldi(or shoirld codsidet such laws md
''
of their known relation KOaudit 1 tWm6 of their significance to the financial statements.
wgulafions from thc
objectives derived from financial starernmt assertions rather
.!
I Posvible illegal acts may come to, the auditor's attentipn'.gsa : . . .
thsn from the perspective of legali~y,per se.
result. of inquiries of mwagcment, and others. The auditor is
The auditor's reqonsibility to detect and report rnjsstatemears required to nuke inquiries of mmlmagement concerning the client's
resulting from illegal acts having a dircct and material effect on 1 complinnce wilh l a w and regulations. The auditor should also ' . . :. .
the financial statements i s the same IE that for rni~mttments : considor thc need to obtain lmeprexentarionsfrom the audit corn-.
'.
ciused by error or,fraud and it~cl~ldes
assusing [he risk t b t w
. minee or others wiDh equivalent authority md respnnsibi1it.ysuch , . .;
illegal act may cause'the financial sutenlents to contain a mate- ; as the bard of directors or the owner in an owner-managed busi-.
,
.
rial misstatement. The auditor should design the audit to pruvidc ! ncss, (hereinafter referred to ns the "audit committee") and the , , ' . .
.
detected. Care
chief bp3.l of5cc.r thzt paszible illegal &cB bpougki m h
ireasansttie a$sumncethgt guch ilIqaI acts wili
should be exercised in planning, performing. and evnlualing uhe I tion have been communicated to ;,heauditor.
~esultsof these procedurs.. The auditor's planning and risk I
. .
assessment process should include consideration af the differen1 Other inquiries may include, but are not limited to;
characteristics of illegal acts: and of factors irldicating incrrascd ; * Discussions with principal offlcers ay part vf the planning '
process.
risk of illegal acts that havt a dircct and material efFect on the (
.. .
financial statements. . . .
I Discussi~nswith legal counsel and others as pan of the evd.
k~nlionof thc adequacy of the accounting far,and the need for.
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May. 07 2085 04: 3BPM
whether the audit cornmittec has b c ~ ninformed of the situa- I
tion and is taking pppr~primaction to investigate the matter.
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Eclm itrbehasbeznfortne~
a hem
*
Engagetnenc risk.
Reliancc on management's mle in the functioning of internal
c~ntrol.
Reliance on mmagement'
s represenrations.
s
Validity and pmpriety of other similar trnnsnctions.
/
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T& comanicatjonswith the audit committee should desciibe the
am and we ~ h m s m e of
s its occurrence, as ~cfemood
by the I Additionally, the auditat should consider whether any concerns
auditor. In additian, the auditor should cornmunicatc thc ptcntial I might be mitigated by thc pe~omanceof additiona1,substantive
on rhe f i d l statements and related disdosures. fie cornaudit
rnunic&0n may either om1 or written. If the m!nmunication ih
oral, the auditor should dncument the &cu.inh
I Tlbe auditor should,be sure that the company's board of directors .
1 or audit committee is fully aware nf the possible oonsequences of
,
1 the uct md has formally approved the course of action to be fd- .
P.t b pbssibk illt~fii.%3
,:"dz,"zeer:
&o*td
of possible illegd i ~ t that
s
j lowed. uhol the cireurnstancxz~SO W-t.
when
come to the auditor's attention, an investigation into the matter :
Materid illegal act5
may be nla& by the audit comnlittee. In certain circumstances,
The m t d a l i t y of m illcgd act cannnt bc appropriately assessed by '
We &"&ormay d i s t on investigation in Old? to ~ o r k ~ l u donk
the effect of the posuibk. illegal act TI the finwcid statements. ; considering only the quantitative effects; the auditor must also con.'
; sider tile qualitative effects of the illegal act. nc$ee&ta may often
inv-$stipatiork$,
the
wdi(
commitm
j
be
fuund
to
0vmShadow
the
act's
immediate
e
f
f
m
Accounting
and
~frm* in conducting
disclovurt ratifications of loss mntingencieq associated with illegal
m y swk uistanct from butsidr cbunsel and other exsuch as
for.ensic accounrmts, 3 necessary. The auditor may consider I acrv should be considered in accardmce with FASB St&ment of
Stnndardfi No. 5, Accourlring far Cunfinge~cies.
TIx d8bmhation
reqmting that the d t ~ ~ m j a kep
e e the auditor apprised of h e
of potential illegal acts will generally entail con- .
myrta ofthe investigation and to facili* diieuesionmw n ~ a n i n g uf thc signifi~8nco
! sultation with the client's legal munsel,
thc invcstigatim bchvocn outsick c o d and he auditor.
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At the cbnclumm of the iwestigdtj~n,t
kauditw sholrld considInunawrirrl illagal acts
er. mutsting that he or she attend the invcstigntive team's prc- I Thc aggrcgatt of all immaterial illegal. acts should be evtlluated h
g e v ~ i o nto the audii committee and doclrmcnting Ule discussion. I relation to the materiality level for the financial statements as a'
1 whole. T'he auditor should consider the effect of each individu;ll
After the audit commitfee has invtvtigatd the possible illqid act
misstiiterncnt and consider raoding an individual misstatement.
and prtstntd thc scopc of their pracedums, their conclusions and :-that has a inaterial effect on an individual account or group of
n t be offset
any remedial actions to the auditor, the auditor shnuld evaluate : accounts, even though that individud m i s ~ ~ t e m emay
the mnclusians nnd determine how Ehey afrelect the audit uf thc \ by other unadjusted rnisstate~nm.The auditor tIneeds to alsc, confinancial s&torncn$. The auditor should coordinate with the ; gidex' the qualitntive aupecw of the illegal act such a$ how h e ille
appropriate level of senior rntmagement and/or the aitdil cornmlt- I gd acr affcctq the auditor's ability to rely on mmagemont ;repretee, based upon the facts and ciruunstmces. to f~cifitatethe audisentations.
tor's cnncultation with fhe client's outside legal counsel about the
ltgnlraxnificatiom of thc possibk illcgal act including, for exam- '
~ ~ ~ O SOfUilhwt
E
a& to thid w r t i ~
plc, whether t a r e is a pennlty which might n m h toc. illegal
Disclosure of an illegal act to p d s other thw the client's audit
act and, if so, the amount, or whether t k trans&ction(s)in qucstion htts sipfiance with res'pect to deductibility of stated I cvwrmiftee is hOi ordinarily part of tke auditoP'~responsibility,
arnounm for taw purpofies and under "cost plus" contracts or othor
and such disclosure would normally be prmluded by thc audiur's
I ethical or legal obligation of confidentiality, unless the matter
similar situations that apply.
j afFectx his or her opinion on the financinl statements. The auditor
Based on tha6 discussions and the results of the investigation, the I should recognize, however, that a duty to notify w e s ourside
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rmm mhalnld ammmm~ r l ~ m 11 n I lt En
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disclosures in the financial statement&, oomn~unicationof inreml . may include the following:
TO a successor auditor when the successor makes inquiries in
contr~ldeficiencies, adlor modifications to the audit report. 1
Depending on thc rcsults of the investigation, the auditor may I
accordance with AU sectiorl 315, Communica)ioras Bemen
also need to considor wherhei' to withdr3w from the engagement. j
i'rr~fecessurand S u c c e ~ Auditors.
s~~
In ~naccordan~~
with AU
r sue.
: section 315, sommunications b&ween p ~ d e c e s s ~and
. . If the cIicnt fails to &vc thc occurrenceof an illegal act the appro- ;
cessor auditws ~ r l u i r cthe specificpqmipsioa of the client,
priatc level of consideration or fails to take the steps deemed wmIn ~.esj-~me
fa a subpoena.
ranted, th6 auditor should mnsidor the impiicntic>nnsof the ilieg.4
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2
': To a funding agency or ather specified agency in a c c ~ c t
r
acl in mlation to his or her initial evaluations atld teevaluetc
with requifr:mcnts for tile m d j of
~
that rneivsfinm>
.
,
FRX NO. :
FROM :
,-ial a s s i s t a m from a' gov~mmontagency. Gnirernment
Adiring sranarh tha the client may bt required by law
regulation tr, npon illegd acts to s ~ c l f i e d
external parties
to a federal inspectnr g e n d or a state attorney
(for
general) and that if the client fails to Rport such xts, then the
the illegal acts directly to the external
auamr should
paay qeificd h,the law or ~ l a t i n nAdditiunally.
.
when an
. iflegal net involes asistance recdved diwtly or indirectly
from a government agency, auditors may have a duty to reporf
il directly if management fails to take appropriate stepx torcrnady the iIlogal ask that the auditor reported to it. See Chapter
5 of Gav+ment Auditing Srandordf und the AlCPA Audit
Guide Gov@mme~t
Auditing Standads and Cx'mhr ,4433
Audits fnr additional guidance.
Because potential, conflicts with
May. 87 2085 64 :22PM
.
/ In the event that the auditor is unable lo O O ~ C ~ U & to the mate-
j
riality 0180 illeaal nct, the auditor should modify hie or hw teport +
I or disclaim an opinion to adequately reflect t k unc*rttlinty.
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Client rcfuIf the clicnt rcfiuste to mept a report that has been rnodificd for
a c1ic.r~-imposedscope remriction or a departure h r n genedly
accepted accounting phciplos, including inadquatt disclosum,'
thc ~iuuditursho~ldwithdraw fmnl the engagement. f5 a client
refuses to accept a report thxt has been aodifir?d for other msons, the auditnr may have no alternative but t o withdim from
th? engagement. In any case of withdrawal, the reasom for the
wilhdmwal should be inrlicaterl in writing to the audit committee.
Deciding whether there is a need to natify parties' outside the
client's organiwtion of -m illegd act is the responsibility of the
company's management. However, 5 . previously indicated, the
'
auditor may havenduty to notify padties outside the cli~nt,
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the auditor's ethical and legal
w
s wrformed under Gov~~rrnwir
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~ll
&d@d~n~
The auditof mny be faced with various reporting issues as a
result of becoming aware of aces that he or she suspects may be
illegal. Depending upon the particular circumstmtcs, thc huditor may consider modifying the auditor's report. Such rnodificxtion mny result from one or more of the following considerntions.
,
\ I n e t r i l i t v t u mjt~l~ty
of an illegal ad
obligations for confidentiality may be complex. the auditor tnay 1
wisll p~ ~ p f i ~with
l t hi$ or her legal counsel before discussing 1
illegal &ti with pnrlief. outcide the client.
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I Auditors perfomling audits under Govertunerir Audiling StandanL.
j also must issue a ~ p o non internal conml over finmcid m@g
! and on compliance and other nlatters that repom on the scope md
j results of testing of the audiw's internal control ovm financial
I ~porti~?g
and COmpIitm& with law$ egullttibn~.,and p d i o n s of
contracts or grant sgmcmcnts. The MCPA Audit Guide,
; G o v c m n t Audihng Smndads and Qrrulnr A-133 Audits proI vides additional guidme on tfie auditor's rcspasibilitim with
regard 10 his report.
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Generally, the auditor shuld disclaim an opinion on the finmcial
statements when pncludcd by lhe client fmn fipplying dl the
procdu~tswmsiclcre~lnocessaa-y i~
the ci~umsmnces,In si.wc
tiotls not involving a clieni-imposed scope restriction (e.g,
appointmen1 of the auditor after the clicnt's physical inventory
ha6 heen. taken) and depending upon the auditor's assessment of
the importance of the omitted procedut.es, the auditor mny con~iderqudifying the opinion or disclaiming an npinion. Tn the litta case, the decisian should reflect the auditor's asvcss~nentof
thc significance nf the matter to the particular enlity and h e pervasiveness and magnitude of the polefi~iald i m [ and inclircct
e8em of the acts in question on ihe ciieni'5 finmcid skt€l.;;ents
taken as a whole.
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DmYturc from ~enerallva c ~ ~ t a r i n c i ~ l c s I
When the auditor has been abh to oonduot the autlil in accor- j
dance with gmmlly al'ccptcd auditing mandnrds and concludes
m event or transaction has nut been properly awunted for or dis- I
clnsed in the financial statements, the auditor m y qualify the
opinion or i~iiuean d v e opilli~ndopending upon the mngni- ;
l u d ~of the potentid effects of the event or transaction. If thc j
dc~nmur:fmm ge~terally8 m p d arcuunting principlw rc9ults
fmm inadquate disclosure, the'nuditar's modified reprt should I
,provjde the inforniation arnitted by the client.
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Tho audit dacumentatiun should indude appropriate docurnentation with msptct to:
The rcquired inquiries related to possible illegal acts and cornplimce with laws xnd regulations.
Conzpruly policies nlativt to the prtvsntion of illegal acts, and
the use of directives md periodic fipre~entationsmnce&g
compliance with laws and regulations,
Circumstances identified that indicate the possible existence of
illegal acts and conclusions reached thereon, if applicable.
* "ihe auditor's hsscssmzn: of thc p~cxdufesp&omed by
company to determine that the illegal act ws properly
uccou~'~td
for and disclosed, if applicable.
Whether atly u n c ~ m t k dmisstatements appear to represent
illegd act^, if applicable.
Wb&n tep~multionfrom managemem concerning ~e tlbscncc
of violrrtions orpossible violations of laws md rcgdationi
t3i~cussion~
with management, the audit cornmi&, and, if
applicable, tho b o d of directors.
Rcprcsentatlcms from the tludit committee regarcthg satisfuctory completion of any investigatiobs into posdble iUegal acts
undataketl at heir directiolx and sat is fact^^ rcaoIution of the
matidatifid in thc investigation, if applicable.
Please refer to the September 16, 2004 Report on Investigation by Vinson & Elkins
L.L.P., which can be found on the City of San Diego Official Website, by clicking on
"More News & AnnouncementfPress Releases.. .," then "Citywide Press Releases," then
"2004 Press Releases," then "Vinson & Elkins Financial Disclosure Report," or by going
16.pdf
directly to: htt~://www.sandierzo.gov/press/retirement0409
EXHIBIT NO. 5
ATTORNEY TO CLIENT
CORRESPONDENCE
FOR CONFIDENTIAL USE ONLY
Office of
The City Attorney
City of San Diego
MEMORANDUM
MS 59
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DATE:
November 23,2004
TO:
Council Member Donna Frye
FROM:
City Attorney
SUBJECT:
KPMGNinson & Elkins Additional Iilvestigation
You requested a copy of the work plan for the additional investigation to be performed by
Vinsoli & Elkins with respect to the audit by KPMG. Enclosed please find a copy of the plan,
prepared by attorneys and coilsultants for the City and thus within the protection of the attorney
work product privilege and the attorney-client communication privilege. This information is
very sensitive at this time, and premature release of the work plan could frustrate the ability to
timely complete it (as it would give potential subjects of the investigation advance notice of how
the City intends to address certain issues or convey the plan to third parties intent on frustrating
the successful completion of the audit). Such frustration of purpose could be perceived as
interfering with the on-going SEC and U.S. Attorney investigations. We ask that you treat this
information in the strictest confidence.
I
Leslie J. Girard, Assistant City Attorney
7
Council Member Donna Frye
November 23,20@4
Page 2
LJG:ljg
Enclosure
cc: Paul Maco, Esq.
Ken McNeil,.Esq.
Marc Seltzer, Esq.
John Garvey
WORK PLAN I - FOLLOW-UP INVESTIGATION PROCEDURES
DRAFT 11/5/2004 5:35 PM
CONFIDENTIAL
Issue
I
Additional investigative procedures:
/ Proposed
additional
interviewees:
1. Whether the City's disclosures violate the Additional procedures will identifl and address any
antifraud provisions of the applicable securities additional potential illegal conduct of which the City is
on notice.
Whether the City's disclosures violate other Analysis of hard drives as part of across-the-board
laws (such as State securities laws?)
review, as identified on Exhibit 1. Additional forensic
analysis of hard drives to be performed if interviews
Did any illegal acts occur?
and/or procedures suggests it to be necessary.
Source: Letter from Steven G. DeVetter (KPMG) to Les
Girard (City of Sun Diego) (October 11, 2004) at 8.
Additional interviews as specified in Exhibit 1.
Additional procedures will identify and address any Exhibit 1
all possible illegal acts and was it capable of additional potential illegal conduct of which the City is
expanding based on finding made during the on notice.
investigation?
Analysis of hard drives as part of across-the-board
Source: LetterJi.om Steven G. De Vetter (KPMG) to Les review, as identified on Exhibit 1. Additional forensic
Girard (City of Sun Diego) (October 11, 2004) at 8.
analysis of hard drives to be performed if interviews
and/or procedures suggests it to be necessary.
Additional interviews as specified in Exhibit 1.
3. Did the investigation address the possible V&E or another firm to provide legal analyses and
violations of federal tax regulations
associated opinion or other foundation for City conclusion.
with the payment of health care benefits?
Remediation? Financial statement impact?
Source: Letter3om Steven G. De Vetter (KPMG) to Les
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WORK PLAN I - FOLLOW-W INWSTIGATION PROCEDURES
DRAFT 11/5/2004 5:35 PM
CONFIDENTIAL
Girard (City of San Diego) (October 11, 2004) at 8.
4. Whether or not the financial statements Additional procedures will identify and address any Exhibit I
andlor the disclosures were intentionally additional potential illegal conduct of which the City is
misleading? If so, who was involved and what on notice.
remedial action is recommended?
A. Because the V&E report already covered City
pension disclosure issues, additional procedures for this
A. City pension financial statement issues.
item will involve follow-up on information pertaining to
B. SDCERS financial statement issues.
other issues or SDCERS issues.
C. Non-pension City financial statement issues. B-D. Analysis of hard drives as part of across-the-board
review, as identified on Exhibit 1. Additional forensic
analysis of hard drives to be performed if interviews
and/or procedures suggests it to be necessary. Additional
Sozrrce: LetterfraomSteven G. DeVetter (KPMG) to Les
Girard (Ciq of San Diego) (August 9, 2004) at 3; see interviews as specified in Exhibit 1.
D. Shipione allegations.
also Letter Ji-om Steven G. DeVetter (KPLlG) to Les
Girard (City of San Diego) (October 11, 2004) Exhibit I
at 1-2.
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5. Did the City enter any agreement, including
MP2, or otherwise take any actions that
resulted in underfi~ndingor miruse of pension
funds that is a violation of State, City, or other
laws?
Additional procedures will identify and address any
additional potential illegal conduct of which the City is
on notice.
Arialysis of hard drives as part of across-the-board
review, as identified on Exhibit 1. Additional forensic
Sozrrce: Letterfiom Steven G. De Vetter (KPMG) to Les analysis of hard drives to be performed if interviews
Girard (City of San Diego) (August 9, 2004) at 3; see and/or procedures suggests it to be necessary.
also Letter Ji-om Steven G. DeVetter (KPMG) to Les
Girard (City of San Diego) (October 11, 2004) Exhibit I
at 2.
Luce, Forward or another firm to provide legal analysis
and opinion or other foundation for City conclusion,
WORK PLAN I - FOLLOW-UP INVESTIGATION PROCEDURES
DRAFT 11/5/2004 5:35 PM
CO?d"J!IDENTLAL
Girard (City of San Diego) (August 9, 2004) at 3; see
also Lelbr from Steven G. DeVetter (KPMG) to Les
Girard (City ofSan Diego) (October I I , 2004) Exhibit I
at 4.
9. Did the SDCERS Board and/or the City Luce, Forward or another firm to provide legal analysis
violate the California Constitution by allowing and opinion or other foundation for City conclusion.
the City to intentionally underfund the plan?
Sozlrce: Letterfr.orn Steven G. De Vetter ( K M )to Les
Girard (City of Sun Diego) (Azlgusf 9, 2004) at 3; see
also Letter from Steven G. DeVetter (KPMG) to Les
Girard (City of Sun Diego) (October 11, 2004) Exhibit I
at 5-6.
10. Was undue influence placed on the actuary
to change assumptions to reduce the shortfall
of the City's contribution compared to the
ARC and, if yes, at whose direction and what
action does the City plan to take to rectify this
action?
Additional procedures will identify and address any Exhibit 1.
additional potential illegal conduct of which the City is
on notice.
Analysis of hard drives as part of across-the-board
review, as identified on Exhibit 1. Additional forensic
analysis of hard drives to be performed if interviews
Source: Letterfr.orn Steven G. De Vetter ( W M G ) to Les and/or procedures suggests it to be necessary.
Girard (City of Sun Diego) (Atgust 9, 2004) at 3; see
also Letter porn Steven G. DeVetter (KPMG) to Les
Girard (City of Sun Diego) (October 11, 2004) Exhibit I
at 6.
WORK PLAN I - FOLLOW-UP INVESTIGATION PROCEDURE3
DRAFT 11/5/2004 5 3 5 PM
CONFIDENTIAL
I including on issues related to the Gleason settlement.
6. Did the SDCERS Board breach their
fiduciary duty by allowing the City to additional potential illegal conduct of which the City is
underfund the plan in exchange for additional on notice.
benefits for current employees and could this
Interviews of additional SDCERS personnel and review
action have been in violation of any laws?
of additional documents from SDCERS, including DPC
Source: LetterJLom Steven G. De Vetter (KPMG) to Les electronic documents.
Girard (City of Sun Diego) (Azigzlst 9, 2004) at 3; see
also Letter ?om Steven G. DeVetter (KPMG) to Les
Girard (City of Sun Diego) (October 11, 2004) Exhibit I
at 3.
Additional interviews
with members of the
SDCERS Board or
other
SDCERS
personnel.
Analysis of hard drives as part of across-the-board
review, as identified on Exhibit 1. Additional forensic
analysis of hard drives to be performed if interviews
and/or procedures suggests it to be necessary.
Luce, Forward or another firm to provide legal analysis
and opinion or other foundation for City conclusion.
7. Is the use of surplus earnings to pay city Luce, Forward or another firm to provide legal analysis N/A
obligations such as benefits outside of the plan and opinion or other foundation for City conclusion.
illegal?
Source: LetterJLonl Steven G. DeVetter (IKBMG) to Les
Girard (City of Sun Diego) (Allgust 9, 2004) at 3; see
also Letter from Steven G. DeVetter ( W I G ) to Les
Girard (Ciw of Sun Diego) (October 11, 2004) Exhibit I
at 4.
8. Did the city violate the City Charter by Luce, Forward or another firm to provide legal analysis
failing to fund its retirement plan as required and opinion or other foundation for City conclusion.
by the City Charter?
Source: Letterfionz Steven G. DeVetler (KPMG) to Les
WORK PLAN 11 - SHIPIONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
Allegation1
Initial Response:
Additional investigative procedures and
proposed additional interviews:
1. The funding deficit is due to "a tortured
interpretation of the Municipal Code used to
hide
unfunded
liabilities
so
City
contributions will be artificially reduced."
"The City has removed assets from the plan
to pay contributions or benefits, thus
preventing assets from being reinvested in an
actuarially sound manner."
The City has concluded that the deficit, while
partially attributable to underfunding, was also the
result of other factors, such as use of the "surplus
earnings" concept. The Waterfall approach to
contingent benefits has a negative impact on system
funding.
Luce, Forward or another firm to provide
legal analysis and opinion or other
foundation for City conclusion.
Analysis of hard drives as part of acrossthe-board review, as identified on Exhibit 1.
Additional forensic analysis of hard drives
to be performed if interviews andlor
procedures suggests it to be necessary.
Source: Letter from Diann Shipione (CERS Trustee)
to Lamont EiveN (Assistant City Manager, City of Sun
Diego) (December 31, 2002) at 2.
Follow up on additional information, if any,
during additional interviews as identified on
Exhibit 1.
I
Renew requests for interviews from
individuals who were unavailable or
declined to participate, such . as Diann
Shipione.
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2. The City has substantially increased Although this statement does not identify any specific / NIA
benefits without necessary funding.
potential illegal act, the City agrees that it did not
I fullv fund its ensi ion plan to covet the costs of the I
I
Source: Letterfrom Diann Shipione (CERS Trustee) benefits granted in 1996-2002.
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to Lamont Elwell (Assistant City Manager, City of Sun
I
Many of the statements made by Diann Shipione in her various letters are factual statements that do not appear to require further investigation -for example, her statement that
the SDCERS "funding ratio was 68% with a UAAL of $720 million" is taken from the actuarial valuation reports and is not in dispute. See Letter from Diann Shipione (CERS
Trustee) to Lamont Ewell (Assistant City Manager, City of San Diego) (December 3 1, 2002) at 1. This document does not summarize such statements, but only those allegations
that, on their face, appear to potentially require further investigation.
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WORK PLAN II - SHIPIONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
3. No other large public retirement systems This is not accurate; San Diego County, for example,
have intentionally underfunded the pension uses the "surplus earnings" concept in administering
program.
its plan, including the payment of post-retirement
health benefits2
Source: Letter from Diann Shipione (CERS Trustee)
to Lamont Ewe11 (Assistant City Manager, City of San
Diego) (December 31, 2002) at 2.
4. The use of "cash basis" accounting in the
municipal code is incorrectly applied to net
realized gains, which diverts assets during
good earnings years and leaves no cushion
during bad earnings years. The diversion of
"surplus earnings" erodes the actuarial return
assumption of 8%.
,
Although this statement does not identifjr any specific
potential illegal act, the diversion of surplus earnings
could be viewed as inconsistent with the 8% return
assumption.
Source: Letter porn Diann Shipione (CERS Trzutee)
to Laniont E~vell(Assistant City Manager, City of San
Diego) (December 31, 2002) at 3.
L
5.
Certain liabilities are hidden as The treatment of certain Corbett liabilities as
"contingent" in off-the-books "reserve" contingent is open t o interpretation, but the structure
accounts.
and functions of the SDCERS reserve accounts were
not hidden and were disclosed in the SDCERS
Letter from Diann Sh@ione (CERS T~ustee) CAFR. The V&E report concluded that it was in the
10 Lamont Eivell (Assistant City Manager, City of San
best interest of the City to have the Corbett liabilities
Diego) (December 31, 2002) at 3.
computed as part of the UAAL, which has been done.
See V&E Report, at 5 n.9.
7. The City entered the Manager's Proposal
in 1996, which allowed intentional
underfunding and the employees were
bought off with benefit increases that the
City did not pay for. This was done over
objections that the plan was inconsistent with
the City Charter and pushed the costs on to
hture taxpayers.
The City has concluded that MP 1 .did ailow payment
of less than the full ARC, this' arrangement was
contingent on benefit increases, and the decision not
to fully fund the benefits granted at the time of'MP 1would require payment by future taxpayers. . ..
Source: Letter )om Diann Shipione (CERS Tnwtee)
to Lamont E~vell(Assistant City Manager, City of Sun
Diego) (December 31,,2002) at 4
Luce, Forward or another firm to provide
legal analysis and opinion or other
foundation for City conclusion.
Analysis of hard drives as part of acrossthe-board review, as identified on Exhibit 1.
Additional forensic analysis of hard drives
to be performed if interviews andlor
procedures suggests it to be necessary.
Follow up on additional information, if any,
during additional interviews as identified on
Exhibit I .
Renew 'requests for interviews from
individuals who were unavailable or
declined to participate, such as Diann
Shipione.
8. In 2000, labor benefits were increased in The Corbett settlement did increase labor benefits N/A
the Corbett settlement, but "to mask the and there is some question as to whether or not these
enormous financial impact of this additional benefits can be considered contingent. The V&E
3
WORK PLAN I1 - SHIPIONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL,
benefit the liability was labeled 'contingent"' report concluded that it was in the best interest of the
through the use of surplus earnings to pay City to have the Corbett liabilities computed as part
this benefit.
Corbett is not contingent, of the UAAL, which has been done.
however, because it accrues in years that it is
not paid, and the City has always known this.
Source: Letter fi-om Diann Shipione (CERS Trustee)
to Lamont E1veIl(.4ssistan1City Manager, City of Sun
Diego) (December 31, 2002) at 6.
9. MP I1 was approved over the strong Both the fiduciary counsel and the actuary ultimately Analysis of hard drives as part of acrossobjections of both the actuary and fiduciary approved IvfP 11, after certain changes were made to the-board review, as identified on Exhibit 1.
counsel.
Additional forensic analysis of hard drives
the initial proposal.
to be performed if interviews andlor
Sozrrce: Letter $.om Diann Shipione (CERS T~zwtee)
procedures suggests it to be necessary.
io Lamont EiveIl (Assisiant City Manager, City of Sun
Diego) (December 31. 2002) at 7.
Follow up on additional information, if any,
during additional interviews as identified on
Exhibit I.
Renew requests for interviews from
individuals who were unavailable or
declined to participate, such as Diann
Shipione.
10. MP 11 is flawed because it removes the
82.3% floor, removes the requirement to
reach full EAN funding by 2009, and
excludes significant unfunded liabilities to
inflate the funding ratio.
Source: Letter fi-om Diann Shipione (CERS Trzrsteej
Although this statement does not identify any specific
potential illegal act, the MP I1 agreement retained the
82.3% floor but altered the consequences of falling
below that floor and removed some of the other
requirements that would have been required under
some interpretations of IvfP I.
WORK PLAN I1 - SHIPIONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
to Lamont EivelI (Assistant City Manager, City of San
Diego) (December 31, 2002) at 7.
11. MP I1 threatens the City budget in 2009,
when the funding ratio will fall to 52% and
contributions will be more that $250 million
per year. By 2009, UAAL will be $2.8
billion and contribution rates at 40% of
payroll.
Although this statement does not identify any specific NIA
potential illegal act, these figures were disclosed in
the City's Voluntary Disclosure on January 27, 2004.
Adjusted in part by the Gleason settlement, the City
intends to further address through pension obligation
bonds once the audit is in place.
Sollrce: Letter from Diann Shipione (CERS Ti~wtee)
to Lamont EiveN (Assistant City Manager, City of San
Diego) (December 31, 2002) at 8.
12. The 2002 benefit enhancements were
conditioned" on contribution relief. Despite
the City's official position, MP I1
contribution
agreement
and
benefit
enhancements were linked.
Analysis of hard drives as part of acrossthe-board review, as identified on Exhibit 1.
Additional forensic analysis of hard drives
to be performed if interviews and/or
procedures suggests it to be necessary.
to Lamont Eivell (Assistant City Managel; City of San
Diego) (December 31,2002) at 9.
Follow up on additionaI information, if any,
during additional interviews as identified on
Exhibit 1.
Although this statement does not identifjr any specific
potential illegal act, it is unclear to what extent the
benefits were conditioned on MP 11, because many
people disagree, many on the SDCERS Board
perceived that it was and that they were subject to
pressure due either to the linkage- or the perceived
Sozrrce: Letter from Diann Shipione (CERS Trustee) linkage.
LC
I
Review additional City Council documents.
Renew requests for interviews from
individuals who were unavailable or
declined to participate, such as Diann
Shipione.
13- hnendments to the Municipal Code in Allegations of conflict with the City Charter to be Luce, Forward or another firm to provide
legal e~nalysis and opinion or other
2002 undermine actuarial soundness by
WORK PLAN I1 - SHII)IONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
i
deleting language regarding actuarial addressed by additional inquiry.
evaluation driving contributions,
replacing it with "pursuant to a MOU." This
conflicts with the City Charter.
foundation for City conclusion.
Source: Letter Ji-om Diann Shipione (CERS Trustee)
to Lamont Eivell (Assistant City Manager, City of San
Diego) (December 31, 2002) at 9.
14. The trading of benefits for contribution The City is aware of no evidence that fiduciary
relief presents a conflict of interest. This counsel objected to the indemnity agreement, but this
conflict of interest is so severe that the issue will be investigated further.
SDCERS Board required an indemnity
agreement and its fiduciary counsel objected.
Analysis of hard drives as part of acrossthe-board review, as identified on Exhibit 1.
Additional forensic analysis of hard drives
to be performed if interviews andlor
proced~lressuggests it to be necessary.
Sozrrce: Letter Ji-om Diann Shipione (CERS Tnutee)
to Lamont Eivell (,4ssistant C i y Manager, City of San
Diego) (December 31, 2002) at 10-11.
Follow up on additional information, if any,
during additional interviews as identified on
Exhibit 1.
Renew requests for interviews fiom
individuals who were unavailable or
declined to participate, such as Diann
Shipione.
15. The effect of MP I1 is to disregard sound
actuarial principles in order to accommodate
benefit increases and "to give the City a false
financial condition."
Although this statement does not identify any specific N/A
potential illegal act, MP I1 had the effect of
decreasing the City's contributions and was not
accurately disclosed in the City's financial statements
and disclosures. The use of surplus earnings was the
Source: Letter from Diann Shipione (CERS Tnrstee)
primary
cause of the underfunding, with MI? I and
lo Lamont Eivell (Assistant City Manager, City of San
MP
I1
contributing
to the deficit.
Diego) (December 31, 2002) at 11.
WORK PLAN I1 - SHLPIONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
The City has not found any evidence to date of an
intentional effort to present the City's financial
condition falsely, and the condition was correctly
described in the Voluntary Disclosure.
16. The MI? 11 agreement was opposed by The outside professionals ultimately determined that Luce, or ward or another firm to provide
legal analysis and opinion or other
outside experts and may contravene MP I1 was acceptable, if not ideal.
foundation for City conclusion.
California law providing retirees with a
Allegations regarding California - law will be
"vested right" in a sound pension system.
addressed through additional inquiry.
Source: Letter 3 o m Diann Shipione (CERT Eustee)
to Lamont Eiuell (Assistant City Manager, City of Sun
Diego) (December 31, 2002) at 11.
.
17. The CERS Board is filled with members Although this statement does not identify any specific Additional interviews with members of the
that have conflicting interests in its decisions. potential illegal act, this alleged "conflict" was SDCERS Board of Administration.
created by the City Charter and there is a history of
Source: Letter from Diann Shipione ( C E m Trustee) advisory opinions on this issue. The voters of the
Lamonf 1"'
@ssis'a"t City Manager, City of Sari
city of sari ~i~~~ approved a resolution correcting
Diego) (December 31, 2002) at 12..
this issue on a going forward basis.
Although this statement does not identify any specific NIA
potential illegal act, the switch from EAN to PUC in
1991 was designed to reduce the City's contributions.
PUC, it should be noted, is approved by GASB, and
provides a lower figure for UAAL than, for instance,
h m e : Letterfrom Diann Shipione (CERS Trzutee) the EM method
18. The 1991 conversion from EAN to PUC
was designed to increase the hnding ratio;
PUC is less accurate. Postponing EAN is
"funny accounting."
to Lamont Eiuel2 (Assistant City Manager, City of Sun
Diego) (December 31, 2002) at 3, 12.
7
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WORK PLAN rx - SHIPIONE ALLEGAT~ONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
Although this statement does not identify any specific
potential illegal act, the Waterfall approach to
books", such as Corbett, retiree health contingent benefits has a negative impact on system
benefits, 13th check, etc.
funding. Retiree health benefits, it should be noted,
are not part of the UAAL and are not currently
Source: Letter Ji-om Diann Shipione (CERS Tnutee) required to be disclosed *in the City's financial
to Lamont Eivell (Assistant City Manager, City of Sun
statements.
Diego) (December 31,2002) at 12.
The V&E report noted that the treatment of part of
the Corbett benefits as contingent is open to question,
and that it was in the best interest of the City to have
the Corbett liabilities computed as part of the UAAL,
which has been done.
20. CERS does not use one of the "GASB
approved" actuarial funding methods, PUC
favorably distorts the Plan's financial
condition, and no audit has been done.
Although this statement does not identify any specific
potential illegal act, the funding of CERS did not use
one of the GASB-approved funding methods, which
is why it reported an NPO. The PUC cost method,
which is an acceptable actuarial method, provides a
Source: Letter fiom Diann Shipione (CERS Trustee) lower figure for UAAL than, for instance, the EAN
to Lamont Eivell (Assistanr City Manager, City of Sun
method would.
Diego) (December 31,2002) at 13.
.
The non-GASB nature of the fbnding mechanism was
disclosed in a footnote to the financial statements.
The SDCERS actuary had consented to the footnote
disclosure on this issue until 2002, but not thereafter.
2 1. CERS outside investment managers have This allegation, raised in 2002, does not identify any
1 a conflict of interest, charge excessive
1 trading fees, report inaccurately, fail to
specific potential illegal act, and this an issue
exclusively related to the CERS Board that does not
( exercise due diligence over hiring investment implicate the City's financial statements and requires
P
1
WORK PLAN I1 - SHIPIONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
consultants, etc.
no further factual analysis.
Source: Letter fiom Diann Shipione ( C E m Trustee)
to Mayor Dick Mzirphy (May 23, 2002).
22. Underfunding violates recommendations Although this statement does not identify any specific NIA
made by GFOA.
potential illegal act, underfinding of pensions is not
an optimal practice, but the GFOA guidance on "best
Sollrce: Letter from Diann Sh@ione ( C E m Trustee) practicesn is non-binding and does not have the force
to Mayor DickAJurphy (November 18,2002) at 3.
Of law.
n i s issue does not require further
investigation.
23. The City Council members may have Whatever "exposure" exists is not quantified in these N/A
personal exposure for voting for MP 11.
allegations, and to the extent it is on an individual
basis, it does not implicate the City's financial
Sozlrce: Letter fi-om Diann ShQione (CERS Trustee) statements.
This issue does not require further
to dyayor Dick Murphy (Nai7ernber 18, 2002) at 4.
investigation.
-
24. The pension deficit will become greater Although this statement does not identify any specific NIA
than the City's hard assets, which will need potential illegal act, the projected deficit was
disclosed by the City in the January 27, 2004
to be sold to pay for these obligations.
Voluntary Disclosure. These projected consequences
Source: Diann Sh!Pione
Trustee), Union are the speculative statement of opinion by a single
Tribune Op-Ed (April 9, 2003).
individual who is not involved in the City budgeting
process.
This issue does not require further
investigation.
25. "SDCERS openly acknowledges that Although this statement does not identify any specific NIA
their financial materials do not conform to potential illegal act, the City and SDCERS financials
GASB."
openly disclosed this in a footnote prepared by City
9
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,
WORK PLAN I1 - SHIPIONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
Source: Lelterfiorn Diann Shipione (CERS Trustee) staff and the independent auditor, and confirmed by
to Jess E. Van Devanter (September 7, 2003).
the SDCERS ~ctua1-y.~
26. Purchase of service credit liability of $77
million was hidden until 2002 valuation.
Source: Letter from Diann Shipione (CERS Trzutee)
to.Fred Pierce (September 7, 2003).
Analysis of hard drives as part of acrossthe-board review, as identified on Exhibit 1.
Additio~~al
forensic analysis of hard drives
to be performed if interviews andlor
procedures suggests it to be necessary.
Follow up on additional information, if any,
during additional interviews as identified on
Exhibit 1.
Renew requests for interviews from
individuals who were unavailable or
declined to participate, such as Diann
Shipione.
27. CERS altered numbers in the Rules The available documents reflect a dispute on this
Committee presentation to understate point, but there is no evidence of any illegal act by
liabilities.
the City.
Source: Letter ji-om Diann Shipione (CERS Trzrstee)
to Fred Pierce (September 7, 2003).
28. CERS failed to disclose the "one-year There is a one-year lag in the actuarial valuation used NIA
lag" that "allows the City to pay its already to calculate City contributions, which masked the
deficient contributions one year in arrears."
impacts of the funding approach, but this did not
impact the City financial statements.
Sozlrce: Letter from Diann Shipione (CERS Tnwtee)
See &E Report at 64-65.
WORK PLAN II - SHIPTONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
I lo Fred Pierce (SeptemberId 2003).
I
29. Transfers into the General Fund from the This is an allegation made after the V&E Report was
City's enterprise funds or other special use completed, and as a result was outside its scope.
funds need to be audited to confirm that these
revenue sources are legitimate and
sustainable and comply with applicable law.
Source: Memorandum from Diann Shipione (CERS
~Aistee) to Steve DeVetter (KPMG) (October 29,
2004).
Luce, Forward or another firm to provide
legal analysis and opinion or other
foundation for City conclusion.
Analysis of hard drives as part of acrossthe-board review, as identified on Exhibit 1.
Additional forensic analysis of hard drives
to be performed if interviews and/or
procedures suggests it to be necessary.
Follow up on additional information, if any,
during additional interviews as identified on
Exhibit 1.
Renew requests for interviews from
individuals who were unavailable or
declined to participate, such as Diann
Shipione.
30. The City's practice of charging water This is an allegation made after the V&E Report was
service rates based upon maintaining completed, and as a result was outside its scope.
uncommitted case reserves in a Rate
conclusion.
Stabilization Fund is highly controversial and
may not comply with state law.
Source: Memorandum from Diann Shipione (CERS
Trustee) to SIeve DeVefter (KPMG) (October 29,
2004).
3 1. The City admits that it does not comply This is an allegation made after the V&E Report was Luce, Forward or another firm to provide
WORK PLAN 11 - SHTPIONE ALLEGATIONS
DRAF'T 11/5/2004 5:36 PM
CONFIDENTIAL
completed, and as a result was outside its scope.
may be challenged for future rate increases in
FY 2004-2006.
Source: Memorandum ?om Diann Shipione (CERS
Trustee) to Steve DeVetter (KPMG) (October 29,
2004).
legal analysis and opinion
foundation for City conclusion.
or
other
Analysis of hard drives as part of acrossthe-board review, as identified on Exhibit 1.
Additioinal forensic analysis of hard drives
to be performed if interviews andlor
procedures suggests it to be necessary.
Follow up on additional information, if any,
during additional interviews as identified on
Exhibit 1.
Renew requests for interviews from
individuals who were unavailable or
declined to participate, such as Diann
Shipione.
32. The City has recognized in the past, This is an allegation made after the V&E Report was
though not necessarily in its financial completed, and as a result was outside its scope.
statements, the likelihood that the sums
collected, if challenged in court, would be
ordered returned as an illegal disguised tax.
Sollrce: Memorandz~m@om Diann Shipione (CERS
Trustee) to Steve DeVetter (KPMG) (October 29,
2004).
Luce, Forward or another firm to provide
legal analysis and opinion or other
foundation for City conclusion.
Analysis of hard drives as part of acrossthe-board review, as identified on Exhibit 1.
Additional forensic analysis of hard drives
to be performed if ihterviews andlor
procedures suggests it to be necessary.
Follow up on additional information, if any,
during additional interviews as identified on
Exhibit 1.
WORK PLAN 11 - SHIPIONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
Renew requests for interviews from
individuals who were unavailable or
declined to participate, such as Diann
Shipione.
33. The City does not provide accurate This is an allegation made after the V&E Report was
payroll data. Artificial n~anipulation of completed, and as a result was outside its scope.
payroll numbers could result in intentional
underfunding of the pension plan.
Source: Memorandum j.om Diann Shipione (CERS
Trustee) to Steve DeVetter (KPMG) '(October 29,
2004).
Analysis of hard drives as part of acrossthe-board review, as identified on Exhibit 1.
Additional forensic analysis of hard drives
to be performed if interviews andlor
procedures suggests it to be necessary.
Follow 11p on additional information, if any,
during additional interviews as identified on
Exhibit 1.
Renew requests for interviews from
individuals who were unavailable or
declined to participate, such as Diann
,
Shipione.
34. The SDCERS independent consultant, This is an allegation made after the V&E Report was V&E or another firm to provide legal
Mercer, noted that the City may not be completed, and as a result was outside its scope.
analysis and opinion or other foundation for
paying the appropriate Medicare tax on the
City conclusion.
pickup contribution.
Analysis of hard drives as part of acrossSozirce: Abrnorandlrm $.om Diann Sl~ipione(CERS
the-board review, as identified on Exhibit 1.
Trustee) to Steve DeVetter (KPMG) (October 29,
Additional
forensic analysis of hard drives
2004).
to be performed if interviews andlor
procedures suggests it to be necessary.
Follow up on additional information, if any,
during additional interviews as identified on
WORK PLAN II - SHIPIONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
.
1
I Exhibit 1.
Renew requests for ,interviews fiom
individuals who were unavailable or
declined to participate, such as Diann
Shipione.
35. The City and CERS have been paying The City believes that this issue has been corrected.
pension benefits to deceased individuals.
Source: Memorandzrm $om Diann Shipione (CERS
Trustee) to Steve DeVetter (KPMG) (October 29,
2004).
Verify previous corrective action.
Analysis of hard drives as part of acrossthe-board review, as identified on Exhibit 1.
Additional forensic analysis of hard drives
to be performed if interviews andlor
procedures suggests it to be necessary.
Follow up on additional information, if any,
during additional interviews as identified on
Exhibit 1.
Renew requests for interviews fiom
individuals who were unavailable or
declined to. participate, such as Diann
Shipione.
, 36.
The City "back-loads" pension This is an allegation made after the V&E Report was Luce, Forward or another firm to provide
1 underfunding through . manipulation of completed, and as a result was outside its scope.
legal analysis and opinion or other
payroll data
settlement.
and
the
recent
Gleason
foundation for City conclusion, including on
issues related to the Gleason settlement.
Source: Memorandzrm from Diann Shipione (CERS
Tt.ustee) to Steve DeVetter (KPMG) (October- 29,
Analysis of hard drives as part of acrossthe-boasld review, as identified on Exhibit 1.
Additio~ualforensic analysis of hard drives
WORK PLAN 11 - SHlPIONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
2004).
to be performed if interviews andlor
procedures suggests it to be necessary.
Follow up on additional information, if any,
during additional interviews as identified on
Exhibit I.
Renew requests for interviews hom
individuals who were unavailable or
declined to participate, such as Diann
Shipione.
37. CERS has never been comprel~ensively This statement does not identify any specific Interview outside auditing firm.
audited.
potential illegal act, and is not relevant to the City's
audit.
Sozwce: Memorandzlm f i . 0 ~Diann Slzipione (CERS
Trustee) to Steve DeVetter (KPMG) (October 29,
2004).
38. CERS has never applied for or received This statement does not identify any specific Consult with SDCERS on necessity andlor
an IRS determination on its tax-qualified potential illegal act, and is not relevant to the City's status of IRS application.
status and for DROP.
audit.
Source: Memorandum from Diann Shipione (CERS
Trustee) to Steve DeVetter (KPMG) (October 29,
2004).
39. CERS makes payments out of the 401(a)
trust for other than pension benefits, and
there has no determination that payments for
health care can be paid in this manner.
Source: Memorandzlm >om Diann Shjpjone (CERS
The City believes that the health care benefit has not Verify corrective action.
been paid fiom the 401(a) trust for many years, and
the City took corrective action to address this issue in
1996, including an amendment to the City Charter.
This action was approved by SDCERS counsel.
WORK PLAN II - SHIPIONE ALLEGATIONS
DRAFT 11/5/2004 5:36 PM
CONFIDENTIAL
Trustee) to Steve DeVetter (KPMG) (October 29,
2004).
40. The City and SDCERS allow private
sector employees to participate in the public
pension system if they are labor union
presidents.
1
Source: Memorandum from Diann Shipione (CERS
Trustee) to Steve DeVetter (KPMG) (October 29,
2004).
41.
The City and SDCERS allow vesting This statement does not allege any illegal act.
after 4-1 0 years of service.
Solo-ce: Memorandum from Diann Shipione (CERS
Trustee) to Sieve DeVetter (KPMG) (October 29,
2004).
Consult with
payments.
SDCERS on status of
I
EXHIBIT 7
-~
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i
)
'1
\
I
report of stale information concerning the views of the SDCERS actuary on the novel approach
adopted for System funding. Counsel insisted on additional .due diligence before approving the
offering. In the resulting review, the City's internal and external auditors discovered errors
throughout the footnotes to the City's financial statements for fiscal year 2002. Although there is no
reason to believe that any of these largely random and (judged from their effect on the City's balance
sheet) immaterial errors were intentional, the volume of mistakes raised serious questions about the
efficacy of the City's internal controls for financial reporting. As noted above, on January 27, 2004,
the Ciry provided detailed public disclosure of these errors and an exposition on the funded status
of SDCERS, correcting certain omissions in the City's previous disclosure.
1
Based upon our investigation, we conclude that the City's procedures, policies and practices
for disclosure and financial reporting are inadequate in major respects. Undermining the reliability
of its public disclosure have been, among other factors, the City's excessive reliance on outside
professionals to generate its disclosure documents, its lack of procedures to verify the accuracy of
those documents and the absence of high-level oversight to judge the clarity and completeness of
information provided to the investment markets. More generally, City administration had adopted
a minimalist approach to public disclosure, providing the public with negative information only
when it has felt legally required to do so. The result has been a series of damaging revelations, made
without advance warning and in a manner allowing the City to have limited control over the way in
which the information is interpreted. This, in turn,has led to a decline in trust between the City
and the investment markets that must be caremy addressed to restore to the City its former
reputation as among the most financially solid and reliable of California municipalities.
.
Please refer to the 2005 City Attorney's Interim Report #1, which can be found on the
City of San Diego Official Website, by clicking on "City Attorney," and is listed under
"City Attorney Releases Special Reports," or by going directly to:
http://genesis.sannet.~~v/infospc/templateslattorney/pdf/interim
report 01 14 05.pdf
Please also refer to the 2005 City Attorney's Interim Report #2, which can be found on
the City of San Diego Official Website, by clicking on "City Attorney," and is listed
under "City Attorney Releases Special Reports," or by going directly to:
htt~://aenesis.sannet.qov/infospc/templates/attornev/pdf/secondinterimrepo.pdf
Please also refer to the 2005 City Attorney's Interim Report #3, which can be found on
the City of San Diego Official Website, by clicking on "City Attorney," and is listed
under "City Attorney Releases Special Reports," or by going directly to:
http:Ilnenesis.sannet.gov/infospc/templates/attorne~/pdf/thirdinterimeport.pdf
EXHIBIT NO. 8
Page 1 o f 2
s i g n u n ~ a n v i e g o . c o r nArchlves
-,
Pension investigators criticized anew I Firm is seeking more legal help; [1,6,7
Edition]
Philip J. LaVelle. The San Diego Union -Tribune. San Diego, Calif.: Apr 23,2005. pg. B.2.1.7
Abstract (Document Summary)
Yesterday [Michael Aguirre] said the move confirms that the firm has the same problems with the depth of
Vinson & Elkins' work product that KPMG, the city's outside auditor, expressed last fall.
"Vinson & Elkins' lack of independence was well-known to KPMG and to the audit committee before the audit
committee signed on," Aguirre said.
Kroll was hired by the city in February to review internal investigations into city finances by Vinson & Elkins and
the City Attorney's Office. The company will also provide consulting assistance regarding internal financialcontrol deficiencies at City Hall.
Full Text (598 words)
Copyright SAN DlEGO UNION TRIBUNE PUBLISHING COMPANY Apr 23,2005
Editions vary
Consultants hired to review internal investigations into San Diego city finances want to bring more lawyers into
the mix, reopening debate over the work of Vinson & Elkins, a Washington law firm paid nearly $4 million to
study City Hall's financial practices.
The debate over its work is also fueled by revelations that its latest investigation, into whether anyone at City
Hall broke the law, may be presented to the city's audit committee orally and not in writing.
City Manager Lamont Ewell defended the pace of internal investigations into city finances, saying auditors are
making progress. But he did not say when their work will be done.
City Attorney Michael Aguirre said the move to hire more lawyers, and the absence of a written report by Vinson
& Elkins, means long- overdue audits of the city's books may be many months from completion.
-
"The city has wasted $4 million on Vinson & Elkins, and now we learn that we're not going to ever see their
written report addressing whether there were illegal acts or not," Aguirre said yesterday.
Vinson & Elkins lawyer Paul Maco declined to comment.
Ewell said hiring more outside lawyers is consistent with City Hall's contract with Kroll Inc., the consulting'firm
that has provided the city's three-member audit committee.
Ewell also said an oral report would be acceptable, according to what he was told by Lynn Turner, a Kroll senior
adviser leading the audit team.
"From an auditing investigative report, you're looking at the work product, the methodology of getting there, Kow
you test something," Ewell said. "So it's not so much a written report."
In a letter to Kroll on Thursday, Aguirre objected to hiring more outside lawyers, calling the move unnecessary
and one which must be approved by the mayor and City Council.
Yesterday Aguirre said the move confirms that the firm has the same problems with the depth of Vinson &
~ ~ ~ ~ ~ V I ~ D ~ L I U J ~ ~ISIG
;IU~
VGU
S.C;UIII
rage L or L
Elkins' work product that KPMG, the city's outside auditor, expressed last fall.
Turner denied in an interview Thursday that there are significant problems with Vinson & Elkins.
KPMG has been working on -- but has not finished -- audits of the city's 2003 and 2004 books. The absence of
these reports led one major Wall Street credit-rating agency, Standard & Poor's, to suspend its rating of the city
in September.
A letter from KPMG in October that expressed concerns with Vinson & Elkins said the audits cannot be
completed until the possibility of illegal acts by city officials is explored.
The previous month, Vinson & Elkins issued a voluminous report finding widespread irregularities in the city's
financial reporting practices, but no evidence of wrongdoing.
Vinson & Elkins was hired last year to represent the city in talks with the Securities and Exchange Commission.
The SEC is investigating possible securities fraud related to the city's failure to disclose troubles at the $3.6
billion San Diego City Employees Retirement System in documents provided to investors. .
The FBI and U.S. Attorney's Office are also investigating the pension system, which has a $1.4 billion deficit,
and the city's financial practices.
In the wake of KPMG letters, the city directed Vinson & Elkins to look into possible illegal acts.
"Vinson & Elkins' lack of independence was well-known to KPMG and to the audit committee before the audit
committee signed on," Aguirre said.
Kroll was hired by the city in February to review internal investigations into city finances by Vinson & Elkins and
the City Attorney's Office. The company will also provide consulting assistance regarding internal financialcontrol deficiencies at City Hall.
Credit: STAFF WRITER
Reproduced with permission of the c~pyrightowner. Further reproduction or distribution is prohibited without
permission.
KPMG lnternafional (NAICS: 541211 ) , Kroll Associates (Sic:7381 ) , Vinson & Elkins
Companies:
Section:
LOCAL
Text Word Count 598
Document URL:
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Benito Romano
Partner
bromano@willkie.com
MAIN OFFICE:
New York
W i l l k ~ eFarr & Gallagher LLP
7 8 7 Seventh Avenue
New York, N.Y. 10019-6099, U.S.A.
T 212-728-8258
F 212-728-9258
Benito ~ o m a n ois a partner in the Litigation Department of Willkie Farr & Gallagher LLP in New York. Mr. Romano
specializes in complex criminal and civil litigation in all phases leading t o trial, including criminal and regulatory
investigations.
Selected Professional and Business Activities
Mr. Romano is a member o f the American Bar Association, Section on White Collar Crime Practice; the New York
State Bar Association, Section on Trial Practice; the Federal Bar Council; and t h e Association of the Bar of the
City of New York, Chair, Litigation Committee. He serves as a member o f the Magistrate Selection Panel for the
Southerfi District of New York.
Over the last decade, Mr. Romano has been a lecturer or participant in panel discussions before practicing
attorneys on numerous topics related t o federal criminal law.
Prior Experience
Prior t o his return t o private practice, Mr. Romano served as United States Attorney, representing the United
States in all criminal and civil court proceedings in the Southern District of New York. He supervised
approximately 160 Assistant United States Attorneys in the Criminal and Civil Divisions o f his office. Prior t o
assuming the position of United States Attorney, Mr. Romano served in a variety of supervisory and executive
positions in that office.
Education
1977, Columbia University School of Law, 3.D.
1972, New York University, B.A.
Bar Admissions
New York, 1977
Courts
rm United States Court of Appeals, 2nd Circuit, 1984
m United States Court of Appeals, 6th Circuit, 1 9 9 1
m United States District Court, Eastern District of New York, 1994
o United States District Court, Southern District of New York, 1977
1
LOCAL
Pension investigators criticized a n e w I Firm i s seeking m o r e legal help
Philip 3. LaVelle
STAFF WRITER
632 words
23 April 2005
The San Diego Union-Tribune
1,617
B-2: 1,7
English
O 2005 San Diego Union Tribune Publishing Company. Provided by ProQuest Information and
Learning. All Rights Reserved.
Consultants hired to review internal investigations into San Diego clty finances want to bring more
lawyers into the mix, reopening debate over the work of Vinson & Elkins, a Washington law firm
paid nearly $4 million to study City Hall's financial practices.
The debate over its work is also fueled by revelations that its latest investigation, into whether
anyone at City Hall broke the law, may be presented to the city's audit committee orally and not in
writing.
City Manager Lamont Ewell defended the pace of internal investigations into city finances, saying
auditors are making progress.,But he did not say when their work will be done.
City Attorney Michael Aguirre said the move to hire more lawyers, and the absence of a written
report by Vinson & Elkins, means long- overdue audits of the city's books may be many months
from completion.
"The city has wasted $4 million on Vinson & Elkins, and now we learn that we're not going t o ever
see their written report addressing whether there were illegal acts or not," Aguirre said yesterday.
Vinson & Elkins lawyer Paul Maco declined to comment.
Ewell said hiring more outside lawyers is consistent with City Hall's contract with Kroll Inc., the
consulting firm that has provided the city's three-member audit committee.
Ewell also said an oral report would be acceptable, according to what he was told by Lynn Turner, a
Kroll senior adviser leading the audit team.
,
"From an auditing investigative report, you're looking at the work product, the methodology of
getting there, how you test something," Ewell said. "So it's not so much a written report."
I n a letter to Kroll on Thursday, Aguirre objected to hiring more outside lawyers, calling the move
unnecessary and one which must be approved by the mayor and City Council.
Yesterday Aguirre said the move confirms that the firm has the same problems with the depth of
Vinson & Elkins' work product that KPMG, the city's outside auditor, expressed last fall.
Turner denied in an interview Thursday that there are significant problems with Vinson & Elkins.
KPMG has been working on -- but has not finished -- audits of the city's 2003 and 2004 books. The
absence of these reports led one major Wall Street credit-rating agency, Standard & Poor's, to
suspend its rating of the city in September.
-
A letter from KPMG in October that expressed concerns with Vinson & Elkins said the audits
cannot be completed until the possibility of illegal acts by city officials is explored.
The previous month, Vinson & Elkins issued a voluminous report finding widespread irregularities
in the city's financial reporting practices, but no evidence of wrongdoing.
Winson & Elkins was hired last year to represent the city in talks with the Securities and Exchange
Commission.
The SEC is investigating posslble securities fraud related to the city's failure to disclose troubles at
the $3.6 billion San Diego City Employees Retirement System in documents provided to investors.
The FBI and U.S. Attorney's Office are also investigating the pension system, which has a $1.4
billion deficit, and the city's financial practices.
I n the wake of KPMG letters, the city directed Vinson & Elkins to look into possible illegal acts.
"Vinson & Elkins' lack of indep&dence was well-known to KPMG and to the audit committee
before the audit committee signed on," Aguirre said,
Kroll was hired by the city in February to review internal investigations into city finances by Winson
& Elkins and the City Attorney's Office. The company will also provide consulting assistance
regarding internal financial-control deficiencies at City Hall.
Editions vary
Document SDU0000020050425e14n00038
Willkie Farr & Gallagher LLP I Attorneys I Michael R. Young
Page 1 of 8
Michael R, Young
myoung@willkie.com
MAIN OFFICE:
New York, N.Y. 10019-6099, U.S.A.
T 212-728-8280
F 212-728-9280
-
Michael R. Young is a litigation partner specializing in securities and financial reporting with a particular emphasis
in accounting irregularities.
His practice focuses upon the representation of officers, directors, audit committees, accounting firms, outside
professionals, and companies in securities class actions, SEC proceedings, and special investigations. His trial
work has included financial reporting matters in federal, state, and bankruptcy courts throughout the United
States, including the first class action tried t o a jury pursuant t o the Private Securities Litigation Reform Act of
1995. His appellate work has included matters at all levels of state and federal courts.
Mr. Young is a member of the Financial Accounting Standards Advisory Council t o the Financial Accounting
Standards Board and also serves as counsel t o the American Institute o f Certified Public Accountants. He has
been ranked by Chambers (USA) among the leading attorneys practicing securities litigation and has been
named by Accounting Today as one o f the "top 100 most influential people in accounting." He is also a member
of the New York Mayor's Advisory Committee on the Judiciary.
Selected Professional and Business Activities
A frequent author on the subjects of financial reporting, audit committee effectiveness and the role and
responsibilities of the independent auditor, Mr. Young's publications include The Financial Reporting Handbook
(Aspen 2003) and Accounting Irregularities and Financial Fraud (Aspen 2d ed. 2002). He has also submitted
testimony in hearings before the Senate Banking Committee's Subcommittee on Securities, the Blue Ribbon
Committee o n Improving t h e Effectiveness of Corporate Audit Committees of the New York Stock Exchange and
the National Association of Securities Dealers, and the Panel on Audit Effectiveness of the Public Oversight Board.
Selected Significant Matters
Congressional and Regulatory Testimony
Hearing on Adapting a 1930's Financial Reporting Model t o the 21st Century, before the Subcommittee on
Securities of t h e Senate Banking Committee (convened by Senate subcommittee t o explore potential
innovations in financial reporting to address concerns regarding accounting irregularities, earnings
management, and stock market volatility)
Hearings before the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit
Committees of the New York Stock Exchange and the National Association of Securities Dealers (written
testimony provided t o blue ribbon panel at the request of the SEC)
Hearings before the Panel on Audit Effectiveness of the Public Oversight Board (panel created a t the
request of the SEC t o study potential improvements t o the outside audit function)
Legislative and Regulatory Pronouncements
Assisted in preparation and/or enactment of:
Private Securities Litigation Reform Act of 1995, 15 U.S.C.
5 789-1 (Supp.
1996) (federal securities reform
Willkie Farr & Gallagher LLP I Attorneys I Michael R. Young
Page 2 of 8
legislation passed by Congress over veto of President Clinton in December 1995)
a
Securities Litigation Uniform Standards Act of 1998, S. 1260, 105th Cong., 2d Sess. (federal securities
reform legislation enacted t o further implement objectives of Private Securities Litfgation Reform Act)
Uniform Accountancy Act, see Accountancy Law R e p m e 1 1031-1050 (CCH) (uniform act governing
certification and practice of CPAs, presently enacted in whole or in part in most states)
a
Statement on Auditing Standards No. 53, The Auditor's Res~onsibilitvt o Detect a n d a p o r t Errors and
Irreqularities
Statement on Auditing Standards No. 54, N e s a l Acts by Clients
Statement on Auditing Standards No. 55, Consideration of Internal Control in a Financial Statement Audit
Statement on Auditing Standards No. 57, Auditina Accountinq Estimates
Statement on Auditing Standards No. 58, Reports on Audited Financial Statements
Statement on Auditing Standards No. 59, The Auditor's Consideration of an Entitv's Abilitv t o Continue as
a Goina Concern
Statement on Auditing Standards No. 60, Communication of Internal Control Related Matters Noted in an
Audit
a
Statement on Auditing Standards No. 61, Communication With Audit Committees
Statement on Auditing Standards No. 65, The Auditor's Consideration of the Internal Audit Function in an
Audit
o f Financial Statements
.-- -- ----.
a
Statement on Auditing Standards No. 69, The. Meanin9 of Present Fairly in Conformity With Generally
W t e d Accountinq Principles in the Independent Auditor's Rep&
Statement on Auditing Standards No. 82, Consideration of Fraud in a Financial Statement Audit; see
AICPA Professiotgil Standards AU 55 316-623 (professional standards constituting Generally Accepted
Auditing Standaws)
Internal Control -- Inteq~t-ed Framework (prepared by the Committee of Sponsoring Organizations
pursuant t o recommendations of the National Commission on Fraudulent Financial Reporting)
a
An Act Relating t o the Sale of Certificates of Deposit, 3 1 Iowa Code
534.702, 534.704 (1993)
(amendment t o Iowa banking code exempting certain broker-dealer activities in connection with brokered
CDs)
An Act Concerning Accountants' Liability, N.J. Stat. C.ZA:53A-25 (amendment t o New Jersey state code
limiting non-privity actions against accountants)
Accounting Investigations
Participated in investigations or inquiries into potential accounting issues involving:
HealthSouth Corporation; Enron Corporation; Xerox Corporation; Cendant Corporation; Edison Schools
Inc.; Just for Feet, Inc.; Lancer Corporation; Janus Funds; Metromedia Fiber Network, Inc.; Elan
Corporation; Footstar, Inc.; Anicom, Inc.; Gemstar-TV Guide International, Inc.; Med Diversified, Inc.;
Emex Corporation; Gerber Scientific, Inc.; Interpool, Inc.; Lucent Technologies Inc.; Health Management,
Inc.; Twinlab Corporation; Cumulus Media, Inc.; Worldwide Xceed Group, Inc.; Breed Technologies, Inc.;
Information Management Associates, Inc.; and Sharp International Corporation.
Willkie Farr & Gallagher LLP I Attorneys 1 Michael R. Young
Page 3 of 8
Litigations
& re The Leslie Fav Companies, Inc. Securities Litigation, No. 92 Civ. 8036 (S.D.N.Y.) -- Representing
defendant accounting firm in $76 million securities class actions arising out of accounting irregularities at
re he Leslie Fay Cos. Sec. Litiq,., 918 F. Supp. 749 (S.D.N.Y. 1996); Wall Street
Leslie Fay. =In
Journal, Mar. 28, 1995, at 1, B1; Wall Street Journal, Mar. 29, 1995, at B10; Wall Street Journal, Apr. 7,
,
1995, at 101; New York Law Journal, May 2, 1996, at 3
1995, at 84; American L a w y ~ June
I n re Health Manaqement, Inc. Securities Litisation, No. 96-CV-889 (E.D.N.Y.) -- Representing defendant
accounting firm in four-week jury trial of securities class actions arising out of discovery of accounting
irregularities at Health Management, Inc. See I n re Health Manaaement. Inc. Securities Litigation, 184
F.R.D. 40 (E.D.N.Y. 1999); Wall Street Journal, Feb. 28, 1996, at 86; Wall Street Journal, Oct. 28, 1999,
a t 82; National Law Journal, Nov. 15, 1999, at 85; NewYorkLaw lournal, Oct. 29, 1999, at 1; Accountin-g
,T
Nov. 22, 1999, at 3; Journal of Accountancy, Feb. 2000, at 15
I n re Fine Host Corp. Securities Litiqation, No. 3-97CV02619-JCH (D. Conn.) -- Representing defendant
company in $175 million securities class actions and bondholder actions arising out of discovery of
accounting irregularities and subsequent restatement of earnings. See Wall Street Journal, Dec. 15, 1997,
at A8; New York Times, Dec. 16, 1997, at D12; Wall Street Journal, Feb. 9, 1998, at 1, C17; Forbes,
March 23, 1998, at 124
I n C a n d i e l s t I n c . Securities Litiqation, No. 99 Civ. 3618 (S.D.N.Y.) -- Representing defendant company,
officers, and directors in securities class actions arising out of discovery of alleged accounting irregularities
at Candie's, Inc. See Wall Street Journal, June 16, 1999, at B13; Wall Street Journal, June 28, 1999, at
A8; Wall Street Journal, Sept. 23, 1999, at B19; New York Post, Sept. 23, 1999, at 38
I n re Twinlab Co_r&Securities Litigation, No. 98-CV-7425 (E.D.N.Y.) -- Representing defendant company
in securities class actions arising out of discovery of alleged accounting irregularities followed by decline in
stock value of $80 million. See New York Observer, Feb. 15, 1999, at 1; Wall Street Journal, Feb. 25,
1999, at B9; Newsday, Feb. 25, 1999, at A52; Newsdav, Mar. 29, 1999, at C8; Wall Street Journal, Feb.
14, 2000, at A34
I n re Alert Securities Litiqation, No. 92-2-9150 (D. Colo.) -- Representing defendant telecommunications
company in $250 million multi-district securities class actions. See New York Times, Jan. 12, 1992, at 315; Los Anqeles Times, Mar. 3, 1992, at D l
I n re Mid-American Waste Systems, Inc. Securities L i t i g m , No. 97-325-AJL (D. N.J.) -- Representing
defendant officers and directors in multi-district securities actions arising out of alleged fraud in
connection with $175 million junk-bond offering. See Wall Street Journal, Apr. 16, 1996, at 814
In re Physician Computer Network,
Inc. Securities Litigation, No. 98-981-MTB (D. N.J.) -- Representing
director and consultant in investigation and multi-district securities class actions arising out of discovery
of accounting irregularities at Physician Computer Network, Inc. See Wall Street Journal, Mar. 4, 1998, at
85, C7; Wall Street Journal, Apr. 3, 1998, at 85
I n re Safety Components International, Inc. Securities Litigation, No. 2000-82-AJL (D. N.J.) -Representing defendant company and officers and directors in securities class actions arising out of
alleged accounting irregularities and restatement of earnings
Dialogic Corn., No. MRS-L-2432-96 (Super. Ct. N.J.) -- Representing defendant company and
officers and directors in $81 million securities class action alleging fraud based on disappointing earnings
Schwartz
v.
-
I n re Union Square Associates Securities Litiqation, No. 11028 (Del. Ch.) -- Representing defendant
issuer, investment bank, officers, and directors in $72 million multi-district securities class actions
I n re First American Center Securities Litiqation, No. MDL 869 (S.D.N.Y.) -- Representing defendant
issuer, investment bank, officers, and directors in $17 million multi-district securities class actions
.-
Willkie Farr & Gallagher LLP I Attorneys I Michael R. Young
Page 4 of 8
Securities Investor Protection Corp. v. BDO Seidman, LLP (S.D.N.Y.) -- Representing defendant
accounting firm in $77 million financial reporting litigation arising out of accounting irregularities and
criminal misconduct at A.R. Baron & Co., Inc. See Wall Street Journal, Mar. 31, 1998, at 613; New York
Times, Mar. 31, 1998, at D7; New York Law Journal, June 12, 2000, at 4; New York Law Journal, June 28,
2000, at 4
Sullivan v. Shearson California Radisson Plaza Partners&,
No. 89-5472 (C.D. Cal.) -- Representing
defendant issuer, investment bank, officers, and directors in $70 million securities class actions
I n re Colonial RealtyCo., Nos. CV-92-0518561-S to CV-92-0518572-S (Super. Ct. Conn.) -- Representing
defendant AICPA in $350 million securities class actions arising out of accounting irregularities at network
of real estate development companies. See Waters v. Autuori, 236 Conn. 820, 676 A.2d 357 (S. Ct.
1996); Journal of Accountan~y,Nov. 1996, at 94; D. Causey & S. Causey, Duties and Liabilities of Public
Accountants (5th ed. 1995) (Jan. 1998 Supp. at 7); 76 The CPA Letter, at 5 (Sept. 1996); see aenerallv
The Hartford Courant, Nov. 11, 1996, at A1
Robbins v. K o ~ e Properties,
r
Inc., No. 95-2882 (11th Cir.) -- Representing AICPA as amicus curiae
participant before Eleventh Circuit in appeal seeking to overturn $81.3 million jury verdict in securities
class action against accounting firm. See Robbins v. Koger Properties,&,
116 F.3d 1441 (11th Cir.
1997); Wall Street Journal, Mar. 8, 1995, at B8; New York Tim=, Mar. 8, 1995, at D2; National Law
Journal, Sept. 8, 1997, at B1
I n re BennettCom~aniesInvestors Litigation, No. 96-601927 (N.Y.S. Ct.) -- Representing defendant
broker in $570 million securities class action arising out of alleged accounting irregularities and Ponzi
scheme at Bennett Funding. See New York Times, Mar. 30, 1996, at 1-41; Wall Street Journal, Apr. 17,
1996, at 1; Washinaton Post, Aug. 10, 1996, at A1
Rabin v. Concord Assets ManaaementGrou~,Inc., NO. 89 Civ. 6130 (S.D.N.Y.)
accounting firm in $700 million securities class action
(
-- Representing defendant
The Hartz Mountain C o r ~ v.
. BDO Seidman, LLP, NO. 96 Civ. 3042 (S.D.N.Y.) -- Representing defendant
accounting firm in $15 million securities action arising out of tender offer for nonpublic company
TBK Partners v. ICH Corp., No. C-82-0695 (W.D. Ky.)
actions involving allegedly improper fairness opinion
-- Representing investment bank in securities class
..
T m p v. The Griffin&,
No. 88 Civ. 1870 (S.D.N.Y.) -- Representing plaintiff real estate developer in
securities action in connection with acquisition of the Taj Mahal casino in Atlantic City. See Wall Street
Journa!, Mar. 22, 1988, at 4; bleew_Vork.kTm.es, May 12, 1988, at D l ; Business Week, May 16, 1988, at
101
I n the Matter o f Fred Alaer Manaqement, Inc., No. NY-5696 (SEC) -- Representing registered investment
adviser in S E investigation
~
arising out of mutual fund advertisements
' i ~ f f r o nv. KPMG.Peat Matwick, No. 11107/91 (N.Y.S. Ct.) -- Representing defendant accounting firm in
four-week jury trial arising out of action t o recover damages allegedly caused by improper audit of
financial statements. See New York Law Journal, Apr. 20, 1994, at 21; New York Law Journal, June 2,
1994, at 5
RTC v. Castellett, No. 92-4635 (D. N.J.) -- Representing defendant accounting firm in $62 million action
prosecuted by RTC arising out of failed savings and loan association
FDIC v. Main Hurdman, No. 5-85-552 (E.D. Cal.) -- Representing defendant accounting firm in $166
million, ten-month jury trial prosecuted by FDIC arising out of failure of,Continental Illinois National Bank
and Trust Company. See FDIC v. Main Hurdmtrn, 655 F. Supp. 259 (E.D. Cal. 1987); Failed Bank &Thrift
R@L, NOV.27, 1991, at 14420; Failed Bank &Thrift Lit. R ~ t r . ,Mar. 11, 1992, at 14918; D. Causey &
Lit.
S. Causey, D@les and Liabilities of Public Acc.ountants, at 12 (5th ed. 1995); I. Whitney, The Trust Factor:
Liberatinq Profits & Restorina Corporate Vitality, a t xvi (1994)
Willkie Farr & Gallagher LLP 1 Attorneys I Michael R. Young
Page 5 of 8
Gee v. Seidman & S e i d m , No. 82,365 (Fla. S. Ct.) -- Representing AICPA as amicus curiae participant
before Florida Supreme Court in appeal seeking reinstatement o f jury verdict in action against accounting
firm. See Seidman & Seidman v. Gee, 625 So. 2d 1 (Fla. App. 1992); D. Causey & S. Causey, Duties and
Liabilities of Public Accountants, a t 143, 200, 388, 392 (5th ed. 1995); Accountant's Liabilitv Review, at 1
(May 1994); see also Wall Street Journal, Apr. 17, 1992, at 88
Ibanez v. Florida Demrtment o f Business and Professional Re3dation. 60-ard o f Accountancv, No. 93-639
(U.S.) -- Representing AICPA as amicus curiae participant before United States Supreme Court in First
Amendment challenge t o state accountancy regulations. See Ibanez vz_St_ateofF!orida Dep't o f Business.&
Prof. Reg,, 114 S. Ct. 2084 (1994); Wall Street Journal, June 14, 1994, a t 810; National Law Journal,
June 27, 1994, at A12
United States v. Tenzu, No. 96-1653 (2d Cir.) -- Representing AICPA as amicus curiae participant before
.
Second Circuit in appeal arising out o f Internal Revenue Service action against a practicing CPA
Kemin Industries, Inc. v. KPMG Peat Marwick, No. 96-1093 (S. Ct. IA) -- Representing AICPA as amicus
participant before Iowa Supreme Court in appeal seeking t o overturn jury verdict in action against
accounting firm
curiae
-
> Colorado State Board of Accou~tancvv. Zaveral Boosalis Raisch, NO. 96-SC-579 (S. Ct. Colo.) -Representing AICPA as amicus curiae participant before Colorado Supreme Court in appeal arising o u t of
state board of accountancy proceeding against accounting firm
I n re WRT Enerav Securities Litiaation, No. 96-3610-JFK (S.D.N.Y.) -- Representing accounting firm t o
establish precedent governing confidentiality protections applicable t o accounting firms producing audit
work papers as nonparties t o litigation
Scioto._Mem_orial Hospitaj-A-s_sIn.v. Price Waterhouse & Cot, NO. 94-409 (Ohio S. Ct.) -- Representing AICPA
as amicus case participant before Ohio Supreme Court in appeal seeking t o overturn jury verdict in
action against accounting firm. See Scioto Memorial Hospital Asstn v. Price Waterhouse, 659 N.E. 2d 1268
(Ohio S. Ct. 1996)
State o f Iowa v. ShearsonlAmerican Express Co., No. 81-514-A (S.D. Iowa) -- Representing defendant
investment bank in action t o enjoin brokerage firm involvement with certificates o f deposit. See Iowa v.
Shearson/American Express Co., 408 N.W.2d 363 (Iowa 1987); see also M. Mayer, The Greatest Ever
Bank Robbery, a t 23 (1990)
Holt Leasinqxo. v. Main Hurdman, No. 185006 (Cal. Super. Ct.) -- Representing defendant accounting
firm i n action t o recover damages allegedly caused by improper advice as t o financial restructuring
National Medical T_ranspo-eation network..^. Deloitte & Touche, No. DO24940 (Cal. 4 t h App. Dist.) -Representing AICPA as amicus curiae participant before California Court o f Appeal in appeal seeking t o
overturn jury verdict in action against accounting firm
Selected Publications and Lectures
The Financial Reportina Handbook (Aspen 2003)
Accountinq Irreqularities and Financial Fraucl (Aspen 2d ed. 2002)
Accountant Liability in m a t i o n Services Handbook: The Role of the Financial Ex(contributing author)
(Wiley 2001)
Eiqhteen Safeguards t o Corporate Self-Investiqatio~,12 Metropolitan Corporate Counsel 13 (December
2004)
The Liability of C o r ~ o r a t eOfficials t o their Outside Auditor for Financial Statement Fraud, 64 Fordham L.
Rev. 2155 (1996), reprinted in T A B e s t in D&O Duties and Liabilities (Bowne 1997) and Corporate
http://www.willkie.com/att0rneys/bio~detail.aspx?iEmployee~ID=323
144605
5/7/2005
,
Willkie Farr & Gallagher LLP I Attorneys I Michael R. Young
'
-.
Page 6 of 8
m l i a n c e : How t o Be a Good Citizen C o r ~ o r a t i o nThrouqh Self-policing (PLI Supp. 1996)
a
Financial report in^ and Risk Management in the 21st Centuw, 65 Fordham L. Rev. 1987 (1997) (coauthored with AICPA's General Counsel t o present legal precepts underlying risk-management proposals
o f AICPA's Special Committee on Assurance Services)
A Shift in-ponsibilitv
for Financial Reporting: The Trend of a Decade (comhissioned by AICPA Center
for Excellence in Financial Management for presentation a t 1998 AICPA Fall National Industry Conference)
a
The Orisin o f Financial Fraud, 8 Metropolitan Corporate Counsel 14 (April 2000)
The Audit Committee, Internal Audit, and the Outside Auditor, 8 Metropolitan Corporate Counsel 15 (May
2000)
a
Manaqinq an Accounting Disaster, Securities Litigation 2000 (PLI 2000)
Financial Reporting and the Accounting Profession: The Whirlwind Continues, 31st Annual Institute on
Securities Regulation, 1151 PLI/Corp 95 (1999) (commissioned by ABA Section of Business Law for 1999
Annual Meeting)
a
The Orisin of-Financial Fraud: So Who Gets the Blame?, 8 Metropolitan Corporate Counsel 14 (June 2000)
a
Materiality and Misstatemen_tsin.Financials: A New SEC Attack Aqainst "Earninqs Manaqement," 7 Panel
Counsel Forum 1 (2000)
a
What I s An Audit Committee To Do?, N.Y.L.J., Dec. 16, 1999, a t 1
a
When Investors Rely on Financial Projections, 177 1, of Acct. 26 (1994)
a
The Future of Financial Reportinq, 4 Panel Counsel Forum 6 (1997)
Materiality Assessments and Misstatements in Financial Statements, 7 Metropolitan Corporate Counsel 11
(Nov. 1999)
a
SEC Adopts Audit Committee Rules Based on Blue Ribbon Panel's Recommendations, 8 Metropolitan
Corporate Counsel 5 (Feb. 2000)
Chair, "Financial Reporting and the Accounting Profession" (panel sponsored by Law and Accounting
Committee of the American Bar Association a t 1999 Annual Meeting)
/
a
Chair, "Accounting Irr6gularities: The Peril, Discovery & Cure" (half-day conference on accounting
irregularities co-sponsored by the Financial Executives Institute, American International Group, Inc. and
Willkie Farr & Gallagher)
Speaker, "Today's CFO -- Financial Reporting Responsibilities and Liability" (lecture on trends in
responsibility and liability for financial reporting commissioned by AICPA Center for Excellence in Financial
Management)
"The Origin of Financial Fraud and the Investigative Process" (sponsored by the Foundation for Accounting
Education)
a
"Accounting Irregularities & Financial Fraud: What's An Audit Committee To Do?" (sponsored by Nasdaq,
the American Stock Exchange, and AIG)
a
"The Internal Crisis: Managing an Accounting Disaster" (commissioned by the Information Technology
Association of America, Patton Boggs LLP, and AIG)
a
"Accounting Irregularities and the Evolution of Financial Reporting" (before the CFO ~ o u n d t a b l ein Atlanta)
Willkie Farr & Gallagher LLP I Attorneys I Michael R. Young
a
Page 7 of 8
"Internal Audit and the Blue Ribbon Committee on the ~ffectiveneskof Corporate Audit
Committees" (before the Institute o f Internal Auditors at the Year 2000 International Conference in New
York)
"The Auditor and Financial Fraud" (commissioned by Big 5 accounting firm for national industry
conferences in Miami and Las Vegas)
a
"Accounting Irregularities and Internal Audit" (commissioned by The 1nstit"te for Internal Auditors and the
Association of Certified Fraud Examiners for their 1999 Fraud Conference)
"Accounting Fraud: I s Everyone Doing It?" (panel discussion sponsored by National Economic Research
Associates)
a
"The SEC's Materiality Standard and the Applicability o f New SAB 99" (panel discussion with t h e present
and former SEC Directors of Enforcement)
"SEC Accounting Initiatives: How They Affect Your Practice",(panel discussion with the SEC's General
Counsel and former Director of Division of Corporate Finance sponsored b y Section of Business Law of the
American Bar Association)
"The Origin & Detection of Accounting Irregularities" (to audience of securities analysts on fraudulent
financial reporting)
"Financial Fraud: Origin & Aftermath" (industry conference o f D&O insurance brokers)
"Credit Union Deposits: Are They Debt or Equity" (before Credit Union Committee of American Bar
Association)
"Section 10A Reports and New Issues as t o 'Illegal Acts' under the 1934 Act" (lecture presented t o
corporate counsel based upon new reporting requirements in the Private Securities Litigation Reform Act
of 1995)
a
"Accounting Irregularities and the D&O Insurer" (seminar for claims and underwriting departments o f D&O
insurer on practical and legal issues arising out of the discovery o f accounting irregularities a t the
companies of insured D&Os)
a
"Accountants' Liability as t o Corporate Practice: A Changing Legal Environment" (before the School o f
Professional Accountancy of Long Island University)
"The Hazards of Severing a Client Relationship" (before New York State Society o f CPAs)
a
"A Conceptual Approach to Financial Statements and Financial Analysis" (continuing legal education
l e c t u i ~presented t o bankruptcy and trail lawyers)
Additional Information
a
American Bar Association (Section o f Litigation; Section of Business Law; Committee on Law and
Accounting; Ad Hoc Committee on Public Company Information Practices)
a
Association of the Bar of the City of New York (Committee on Legal Education and Admission t o the Bar,
1982-87)
a
Counsel t o the American Institute of Certified Public Accountants (1987-present)
a
Member, Securities and Shareholder Litigation Practice Panel, American International Group, Inc.
,
Willkie Farr & Gallagher LLP I Attorneys I Michael R. Young
Education
1981, Duke University School of Law, J.D.
1978, Allegheny College, B.A.
Bar Admissions
New York, 1982
Courts
o United States Supreme Court, 1994
o United States Court of Appeals, 2nd Circuit, 1996
o United States Court of Appeals, 9th Circuit, 1990
o United States Court of Appeals, 11th Circuit, 1995
rs United States District Court, Eastern District of New York, 1982
o United States District Court, Southern District of New York, 1982
Page 8 of 8
--
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Romano, Albert John
Active
194001
San Francisco
January 1998
Romano, Anthony Joseph
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121021
San Diego
December 19I
Romano, Bruce Alan
Inactive
73659
Washington
December 19;
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117704
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152471
75116 Paris
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195953
Los Angeles
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179048
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232182
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162696
Los Angeles
December 19<
Romano, Richard Leroy
--------
Aciive
Romano, Robert Kevin
Active
-----
--
-..-."..
Romano, Sara Jean
-*-"
-.
Romanoff, Steven Michael
Los Angeles
--
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---
39359
----San Francisco
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June 1985
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June 1987
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-
December 19f
,-
86712
-----".
Active
227467
Van Nuys
May 1979
San Francisco
December 20(
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131818
La Jolla
December 19I
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195525
Menlo Park
June 1998
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205031
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Younger, Michael Richard Not Eligible To Practice Law 96692
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Michael R. Young #39491
.
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.
This member is active and may practice law in California.
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Profile Information
-.Bar Number 39491
Address
Young & Nichols
1901 Truxtun Ave
Bakersfield, CA 93301
District
District 5
-
-----.--
County
Phone Number
(661)861-7911
Fax Number
(661)861-7932
e-mail
Not Available
Undergraduate
School
Univ of California a
-
-
-
Kern
-
Law School
-
Angeles;
-- CA USA
UC Hastings COL;
Francisco CA USA
Status History
Effective Date -
Status Change
Present
Active
12/23/1966
Admitted to The State Bar of California
-
--
----
Explanation of member status
Actions Affecting Eligibility to Practice Law
Effective Date Description
Case Number Resultin!
Disciplinary
This member has no public record of discipline.
Administrative
12/18/1969
I
-
Suspended, failed to pay Bar membr. fees
Public Protection
This member has no record of public protection actions.
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~ i c h a eRobert
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Profile Information
Bar Number 205031
Address
--
Elliot snyder & Reid
I 0 1 E Redlands Blvd #285
Redlands, CA 92373-4709
Phone Number
-
(909)792-8861
-Fax Number
(909)798-6997 michael.young@es
e-mail
--
P
District
District 6
-
Undergraduate
School
-
County
California St Univ; :
-- Bernardin~CA US/
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San Bernardino
Law School
--
Southwestern Univ
Los Angeles CA UI
---
Status History
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12/7/1999
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12/7/1999
Admitted to The State Bar of California
Active
-
-
------d--..-pp-,
-
-
--
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Actions Affecting Eligibility to Practice Law
Disciplinary
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----
-
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State nar 01
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MlChael Mchard younger
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Michael Richard Younger #96692
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Bar Number 96692
Address
-
Suite 900
100 West Broadway
Glendale, CA 91210
District
Phone Number
(818)242-6859
Fax Number
Not Available
e-mail
Not Available
District 7
Undergraduate
School
Univ of California a
Angeles; CA USA
Los Angeles
Law School
UC Hastings COL;
Francisco CA USA
--
-County.
.-
--
---- --
-
Status History
Effective Date
Status Change
Present
Not Eligible To Practice Law
811011992
--
41411991
-
Active
---
-. -
713011990
Not Eligible To Practice Law
-
1212311980
---
Not Eligible To Practice Law
Admitted to The State Bar of California
Explanation of member status
Actions Affecting Eligibility to Practice Law
Effective
Date
Case
Number
Description
Resulting Status
Disciplinary
This member has 170 public record of discipline.
Administrative
811011992
--------------
Suspended, failed to pay Bar membr.
fees
---
Not Eligible To Pr
Law
.---
-
-
I
-
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--
EX-HIBITNO. 14
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iearch - V olce 01 San UlegO
g5
voice of san d iego
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Further Questions of City's Law Firm
Could Continue Delay of Audits,
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By ANDREW DONOHUE
Voice Political Writer
Published April 22,2005
The city of San Diego's long struggle to finish a self-investigation and release its fiscal
year 2003 and 2004 audits appears headed toward a new phase -- one with more outside
legal counsel.
The consultants brought in to usher the city out of its financial and political storm have
alerted city oficials they will likely ask to bring in their own legal counsel because of
concerns over the independence of the city's chosen law firm, said Troy Dahlberg. He is
one of three accountants -- the other two are former high-ranking officials at the
Securities and Exchange Commission - tasked with untangling the city's cluster of
investigations, accusations and audits.
Health
Housing
The switch could mean M e r delays in the attempt to close the investigations and
return the city to the financial markets.
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Officials from auditor KPMG and the investigators from the SEC have voiced concerns
over the independence of the firm currently conducting the city's investigation into
possible crhrinal acts in connection with the city's $1.37 billion pension deficit. Critics
and experts have questioned whether the firm, Vinson & Elkins, which is also
representing the city before the SEC, can be independent enough to conduct a s-cient
investigation.
"Normally your attorney is your advocate for the city. It's hard to say you're an advocate
and be independent at the same time," Dahlberg said.
The firm released a self-investigation& September that city officials hoped would
reconcile the SEC's concerns over errors and omissions found in financial statements
given to potential investors. The errors failed to l l l y account for the city's pension debt,
among other things.
Technology
Teen Voices
Transportation
Universities
While that investigation was being conducted for the SEC, auditor KPMG became
involved and warned city officials in a series of letters in the summer and fall that the
investigation by the law fm likely wouldn't be sufficient to satisfy their worries that
wrongdoing had been committed by city officials. Already on the hook for the V&E
report, officials pushed ahead with the hope it would suffice for KPMG as well.
It turns out the report didn't satisfy anyone.
Neither Mayor Dick Murphy nor City Manager Lamont Ewell returned calls for
comment. In a previous i n t e ~ e wEwell
,
said the city was aware of concerns &om the
start about the firnl's independence, but stuck with then1because of their experience.
n
being hired in early 2004. It is one of
The firm has been paid inore than $4 ~ l l i o since
a slew of outside consultants and finqbrought in to assist the city. Dahlberg and his
colleagues are paid between $750 and+?6900
per hour.
Dahlberg said his audit committee, wGch consists of former SEC cllairman Arthur
Levitt, will likely need independent counsel that has no connection to the city in order
to analyze laws governing political wrongdoing and financial disclosures. The only
h~p://www.voiceofsandiego.org/site/apps/s/content.asp?c=euLTJbMUK.
..
earch - Voice 01 San ulego
connection they will have to the city, he said, is through billing.
"I think there's enough attorneys," Councilwon~mDonna Frye said.
The municipal world has been watching and waiting for the completion of V&E1s
investigatiofi since October as a sign of the city's recuperation.
Lynn Turner, former chief accountant at the SEC and Dahlberg's colleague, said V&E
will turn over its work to his committee. The conunittee will then combine it with work
done by City Attorney Mike Aguinre in his three investigations. All the data and
docunuents will be coil~binedand turned in to KPMG and the SEC. It is unclear what
V&E1srole will be after turning over the work.
Turner and Dahlberg said the auditor and investigators will be comfortable with their
level of independence. They are in the process of scheduling meetings with new pension
board members .toconvince them of the importance of turning over documents sought by
investigators.
"Once federal officialscome in and look at questionable conduct, you are more than
willing to do anything to cooperate with them, and I don't think anybody has explained
that to them," Dahlberg said.
The board voted last week to maintain its attorney-client privilege in communications
between former board members and attorneys. Federal investigators at the SEC and the
U.S. Attorney's Office - which is investigating criminal wrongdoing -- are seelung
documents related to a controversial deal made between the city and pension board in
2002. The deal allowed the city to continue its historic underhding of the pension
system in exchange for increased benefits for enlployee unions.
The refusal to turn over the documents is another factor in the delays.
Please contact Andre111Donohue directly at
with your thoughts, ideas, personal stories or. tips.
SITE DESIGN: HOLLIS BRAND COMMUNICATIONS
CITY COUNCIL OF THE CITY OF SAN DIEGO
SUPPLEMENTAL DOCKET NUMBER 4
FOR THE REGULAR MEETING OF
TUESDAY, MAY 10,2005 AT 10:00 A.M.
CITY ADMINISTRATION BUILDING
~
COUNCIL CHAMBERS - 1 2 FLOOR
202 "C" STREET
SAN DIEGO, CA 92101
ADOPTION AGENDA, DISCUSSION, OTHER LEGISLATIVE ITEMS
RESOLUTIONS :
ITEM-S504: Acceptance of Audit Committee's Status Report; First Amendment to Agreement
with Kroll, Inc. for Services Related to the Audit of the City's Comprehensive
Annual Financial Report (CAFR); and New Agreement with Willkie, Farr &
Gallagher to Provide Independent Legal Counsel to Kroll and the Audit
Committee On These Matters.
CITY MANAGER'S RECOMMENDATION:
Adopt the following resolutions:
In the matter of accepting the Audit Committee's Status Report.
Subitem-B : (R-2005- )
Authorizing a first amendment to the agreement with Kroll Inc. in the amount of
$1,500,000 for continued provision of investigative services in their role as the
City's Audit Committee, and consulting assistance in assessing internal control
deficiencies affecting matters discussed in the Vinson & Elkins and City Attorney
investigation reports, and directing the City Attorney to prepare applicable
resolution.
Authorizing an agreement with Willkie, Farr, & Gallagher LLP in the amount of
$500,000 for provision of independent legal counsel to the City Audit Committee
and Kroll in connection with the above matters, and directing the City Attorney to
prepare applicable resolution.
Tuesday, May 10,2005
Page 2
ADOPTION AGENDA, DISCUSSION, OTHER LEGISLATIVE m M S (Continued)
RESOLUTIONS: (Continued)
ITEM-S504: (Continued)
CITY MANAGER SUPPORTING INFORMATION:
In February of 2005, the City of San Diego ("City") entered into an agreement with Kroll, Inc.
("Kroll") to receive, review and evaluate the findings of the investigations performed by Vinson
& Elkins ("V&EW)
and the City Attorney, and to provide consulting assistance in assessing
internal control deficiencies affecting matters discussed in the investigation reports (see attached
agreement with Kroll). The original agreement was for a not-to-exceed amount of $250,000.
3
The scope of Kroll's engagement, as memorialized in the original agreement, is two-phased, the
first phase being to serve as an Independent Investigator for matters relating to the unfunded
liability of the SDCERS and for errors discovered in the footnotes of the City's audited financial
statements. This phase includes working with KPMG to understand their concerns and identify a
satisfactory work program to assist them in obtaining the necessary evidence and documentation
required by applicable accounting, auditing and professional services. This phase also includes
review and evaluation of the investigation reports issues by V&E and the City Attorney.
The second phase includes consultation with City personnel to establish internal controls that, if
implemented and properly operated by the City, could provide reasonable assurance that the
transactions identified in the reports in Phase One are properly reported and disclosed in the
City's financial statements. This work is to be coordinated with the City Auditor and
Comptroller, the internal audit department manager, and the City's outside independent auditors
as to the scope and nature of internal controls that the City would need to assess, document,
implement, and test.
By this action, the agreement with Kroll will be increased by $1,500,000, for a total not-toexceed amount of $1,750,000.
Kroll will also be utilizing independent legal counsel from the firm of 'Willkie, Farr & Gallagher
LLP ("Willkie, Farr"). Willkie, Farr's role will be to provide counsel and assistance to Kroll and
the Audit Committee in connection with the independent investigation into SDCERS finances
and disclosure, as well as with other matters that, in the judgment of the Audit Committee, may
require inquiry or investigation (see attached agreement with Willkie, Farr). Willkie, Farr will
report exclusively to the Audit Committee, serving with complete independence from the Mayor
and City Council, the City, and the City's departments, agencies and elected officials.
Funding for the retention of Willkie, Farr is being requested in the amount of $500,000.
Irvine
Aud. Cert. 2500975.
Home > Attorney Resources> Rules B Regulations> Rules of
Professional Conduct
<.' I,' , ,p ] - .;. 12.
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@ Print This
Rule 1-300. Unauthorized practice of Law
(A) A member shall not aid any person or entity in the unauthorized practice of law.
(B) A member shall not practice law in a jurisdiction where to do so would be in violation of
regulations of the profession in that jurisdiction.
FFlX NO.
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May. 87 2Q85 84 :33PM P7
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(8 2004 ' h e ~
V@me 12,No. I2
o Corporate~
~
n
hbcr2M14
Eighteen Safeguards To Corporate Self-Investigation
cmmiams at
1~~
over (hc past sewal yean, thert
a p p to he% btcn an W n g nted
fm investigations into patendal aturuntin^ i m 1 public mupanits: The
.
noad h3S MKeQwndbd, IIOC b W p ~ n & ~ j ,
with m ttpamge in rtpmdmtatnnurte
'of fi&
tmements. Where a& a
rw-t
ia pixmtiany the m l t of
deliberate miscmduq an.inmd invcsdption m
y be nscesmy bath to colwct
fmanckl miaatamncnm and eo dcmwstrate tire sMziency of rhe mfqmy's
rcmttlial action to tbc SEC,thc Bpm~ s n of
t hstim,or the ~ W d ~b d i b of
r
tht eompanY'8 finmad EtEtcmqwtP..
As a
m cbtpdrete b d a havt d i k
mvwcdto their woc. w perils in undertaking mcb an bvcstigarion m. many.
lomztimle they am ovcr8m by ,a h a r d
mmmitkethat is latar fonnd pot Rave
polrsessed suWticnt indtptndtn~e.
Sometimes the law fmr engaged by the
board'r v i a l dmmitce i; isdf i&fficimtly i-mt
or not mfEci&y
wphintim fPr the
Sometimes
manapmnt bttmfma .with the inv&&on bnd the u d i i l i ~of the invmtigative c a n C t u h s are oampmmised
*.
tlmw,
MiclvseI i
t Ibw is 4 Uti.g&on parmer
in ihB New York offics a/ ? W d e Forr
&. QaUqhtv K R
in ~ c u r i ties d f i m i d mrtlru. You nuzy
re&
Young t.u 1212) ~ ~ ~ - s c KA) o .
special thmh to PU U S r m - ~ d k f i n g
. w&eh fir# c ~ t c r u t t dMr Young 3
&f%=rhd
issue, urptri~ctteachw
UlatcwDlinproccdnm wlablishedat the
outset, can act as a m%guard a
wsl
undue ttmprdmi8C of w kv~vGBfigati~1's
indcpmbula md Meatimms, lRey
wH&dbelm It!tMyhtth.,ingDrnG,
invwtigationz, not every cafbguafd ia
wananted nnd that, indeed, not s v q
most ofthe safeguardswould bc n&.
Still, it i s probtrb)~vecful that uley a1
last be considend:
Mlchnel R Young
Wl&c,both tbc SBC asd the auditors
dfinancfd shtemmts have proved td be
particularly tough audicn& for special
commit&%invcstisa~cmar$. Both
havt d c m o n d a strong in-L
in
inmal invcstigaliono h t am irrd$pcndent, thmugh, my3 unlimited in kcopt.
Mareove.r. boh have damonttratul m
intnleronos for investtgatlve report8 that
appear to exoncrate cxtcutivts when
cxoncratinn dnss not appear to b t corn.
pletely juslified by the fhcls. Wtb
q a r d o tbs SBC, the pria of an jnadcquatc isvcstigation mxy inalnds
i n 4 regalatory d.
re*
Ib Lht 0lltBidc auditor, lbc @IT m y
with
includc a failurn to obtain an audit rqmt
on rcatatGd financial 8mmcnts and, in
setious cases, a "IOA *port" in whieh
the auditor elcr& UIC SW jC:that= hd
of dimetors if not taking "timely and
apprqxi~tcrcrnGdid actions."
Wiile the meds of my investigntiorr
wjll nww~sarilydepend up11 Ule ck-
tid a w u n a g i ~ ~ g g u l m iat
% a~ $blic
crrmpany should be overseen'by an
&i&
comprised 8blely oi inatpcndolt directars rn by a simiarly tomp r i d special commit& 04 tbc board
&IcferleIl to &imply ss fsle
"audit commW).
2 'Jh
invGgtjption should b wdmm h i b y asubstwtidlawfirmdgbbd
qnlarim thaL w no prior history af
KportLng 10 nmmgemeor. kgab out.
side counscl, or dcfcnst counsel b
dtitcd litigation, will m i y suPIice.
3. Tht law firm andcr normal dtcummcts must engage sn ammting
41nn tb pmvidc formsic aeowtance.
4. The investigarida may initially
f a g on perticular iPSU6s bat is not to bc
irnptdcd by umasonablt canwaist
The i n w a i g z t m are to have B m t m
p c all Mtidmzc of puWtiBI i m p
+ties no matter where they m
y Itad.
In t h i mgsrd,
~
SAB 99 m y p&dt useful gutdance as to rnawiality.
5. The isvsstigamrs should mnsult
witb the auditat at ~c cnrtseC ~a msure
that the proposed smpe of the investiga.
rion will be sufficient to be mtiad upon
af 6 i~rvestigatihand the Wpraratlm m j n a h t - ~ t h t w m
mil&lc to t b audito~
~
In 0 t h w d s , bwqkpapm.
*Id
hb phirriidly qprlscd of the
lk &mr orey not aocspt as justlffc*
IS- U p the inW@m's q l e ~
a c k p l : l o ~ c b t b c e o o p t t c ~ 6m
~ CM ~ackof 8 ~ to 4hfmutitih
ti6n,.h h t m r win a m 8 the
q~arneudsmbeexpan~.
a t ~ % t &of ~ ~ y ~ l i m t . p r j vori l' ~ c
fidlngs. m d
worx p 8 u e L The auditor will ordinar- 6b)enw bf the
6. ?hLawdIrtmmmc, asspraror
iiy want tn &mint, 1a maUw of fis m J m i m of tbL indg&on and Ule
dmhsamceaadtpne;,rnasthxpme
ownjudglmh hum i n d g a t i v c ma^ qfnt m whi& Ihc i n v d g a h m ten h
wr7Iinpmss to. actively evennt tht
reled npcm for the pllrpose ofimtng an
it will Wdnt tb mviw. The
. ~41Xi@mwd asmm r~pm&iliCy rlpls
may view s f s i b to pdde host mdit npmL
tor3armt~h.~ i a t h f a u d i t ~
~ i a s a s r o p c i i m i ~ m t o ~16 lbe m will w m d y mass
thai Irm IDdtct and q g e thc law fRm
me &rtcat to which me comfmn)y haa
+blc
far m h o t i n g the invcsdga- wbit
12. The audir comni~ee&mld wn- ,taken %mdy md tqmprim ramedial
tlon, and It ia the audit cbmmiuct rn
IDA of the
p
o
~
vpKmrant
~ m &an
P r h a r n t b t ~ ~ a r t t o ~eully its eotmscl aS ta itR ~
1934 AcL An impc~tsataspbctaf thst
and conpatiar, with !he stnR of the
w
m will o f h irrvoIvc tht 4 1 ~ 1 1
sac in txmlwtim wilh en SK: iwGeti- a
b v p bum
gation. That ime 8hmld k B i s w d co whbR campmy
nltcohpmypessormtlartenwmageda I well with the autlim inBofar as the fmhrighc and mudid wth mv-m
wfpme WiSh tha investigation in both
audit comay rqub thc d t O T ma company e h p l d u n
IO m p r r n y compsny prwnncl in
17. T h e q y d b c d c d o p w
S S C ~ ~ t i a n s .
to pmvide ~ I n Iwithi rtp;nfd
~ to
13. On p4Tli=4r issnca, invcstiga ths lawsli@oa md my haw5111state*hcamm& and 19 be hffil andkindid
mrs may Iiad ddmiec phg both WtWS mema a&oted ,by tts amlwlm. m
bob inaimidng and ~ c u l p t o ~ y . d i t mmdw aud irrc)e.@bn
V J me
~ imrcsti-.
ehdd
Tht sndit. c
m
m
m
m
i EW
UndaTmd be nrindful, thxmghout tfie invc&galb%
8. ' h e audit eotnmiUec should an- thar pile auditor will d d t r incriminstdnc~~mqwrhintliapoaiti~l
sidcrthc~bput~nplateprcwlutar iug cvidcncc in ass~~sing
appmpliate
aectpt nnditrrlated repnsbenlatians
to amm h
i e x r n t i v e ~m r m p b p s media' nbim and ior wiiingrrts to to
Liorn~~~KI~harntb@rei
pocdslly hvalvad in mibtmUacL #re
a~oepriepma~riotisProm paniala w i d u w o f ~ q bOO~X~WL
l
not i n f d or
ss to i n y d p tiw pmgrcss or I U I 1
D~s- ~ Y i d ~ .
18. T3nuugho;tthc investigatiom,md
14. U p n ths Inwtigdm's comple
.1ves W d nol h ~ v ethe apporbi~yra
open irs c u m p k t i ~
the andit couu&tH?
tion. thc i r ~ v t s i i wahonld provide a a n d i t $ ~ ~ r n
ia4fn-b with tht invabmtion or haw
my priot svbstmlivr urntnst with indi- qrxt s t t l j ~ gfirth, among ather ah@: to which. additional public disc101)umIs
videals baiog immisared on Ut subthe circumatancce giving rist to t
b apq?isE. flreh disclcmf~!6 b t r l d k
jem imo wblch hqwity b being mntdt.
inv-;
rcvicwtd by thc m d h .prim to ik
lhaiavestj@on's scope:
ipapaacc.
9. Zhc ductit committcE in canjuucthe p o w inttnriswtd;
tidd Wlth its canrunt W 1 d Ednaiacr ihc
C4hMcm
~ m w h i m ~ d i s c b ~ r c g a r d -. ~ u r c e sof !joclmals l e v i d
rn
objaxive
of an immal h V & g a
bg* inv&@an and its subjact matthe mdalyiog fads;
Mmaybrmdd ~ p t e s s ~ c s conchiour ae to aripbIlity a d ,ticm is b hdp the cmpmy put tho Ixpb1m behind it -not m rnmb h e ablm
I;hollId be mdt available for rovicwby
iment:
worse.. Itvakqu~#;i n v m a can
mcpadrm~
&c n d c d cxpI&an of my
anger replators, mnke WMcult or
. to. Thc indgation rnay pmcrcd. IXQSS~Q r).j~Went6t~ Lhe - m y ' s
impoBnible fbe pr~wmcntof n m
- w hall dhbb dbpt&, but is rrbr KI fmrmial s m b m ~and
&Mitt%financial gtetsmants. end
,
be cmpmml& by b
l
nmnw+
~ l l t e ~ c g D f i t d ~
* ploposed ranedial stion.
Ineat p 6 m e , apcbming dtammts for
wrom& A
Tht mtlim and he audit mminib may hnve d c m ~
4rtfningofnPQ174 I M L w o k a N l i by&-,
b u l d discuss w b c h he rtport should ttmwgh md
dal csrrhtmbu. Tk ~ d i wwill
r nol ptrin writing with hppmprieta cog- mdmth by aapMsti@ prqfGsdn
m i t m s o q r r , q " U t y , o r ~ o f a n , be
alsinawsy tbatsfft@tkaW&ity
nirsnce
being fa.Lsn d & n d q and
invssrlMon to be compemised by
d t h t ~ ~ . m w t h o ~ d
dcsiros
d
talevan1
tegalatars.
TJI~
a
u
d
lkEdi&.
cbmuainac 8hould undmtsad rhab publicwmprmy, im bmudddirectxx~,ilt;
mtl mdbr,arrd i$ shmw
11. TheauditmwiUob stJrhtam
~ a b d w k l k a ~ b r e p b t l i sE
pqmu!, tlre auditof ww m m u y dob ers.
ple& t r m c y " m
e
e
n *Ulllm
fm &it ymposur. Thr&ghout (he
of thc hvdgrtion, the nudim
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